The rise of online marketplaces like eBay, Etsy, and Facebook Marketplace has made selling goods easier than ever, but it also means more people are facing new tax obligations. The IRS rules around online payments have evolved, and many sellers are unsure about what they need to report – and whether they even should be reporting at all. Understanding these rules is crucial, as failing to comply can lead to penalties.
How the IRS Tracks Online Sales
The IRS uses Form 1099-K to track payments you receive through third-party networks. For the 2025 tax year, you’ll receive this form if your sales exceed $20,000 and you have more than 200 transactions. However, the key takeaway is this: even if you don’t receive a 1099-K, your online income may still be taxable. The IRS expects you to report all profits, regardless of whether a form is issued.
This matters because the previous lower threshold ($600) was paused by the IRS, but that doesn’t mean you’re exempt. The IRS continues to monitor digital transactions, and ignoring income can result in audits and fines.
Three Types of Online Sellers: How Reporting Differs
The way you report online sales depends on whether you’re casually reselling personal items, running a hobby business, or operating a full-fledged online store.
- Reselling Personal Items: If you sell something for less than you originally paid, there’s no taxable profit. For example, selling a used couch for less than its purchase price doesn’t trigger taxes. However, selling above the original price does require reporting the profit.
- Hobby Income: Casual sellers who aren’t actively trying to build a business still need to report earnings. Even infrequent sales count as taxable income if you make a profit.
- Running an Online Business: If you’re selling regularly to earn money, you’re considered a business for tax purposes. This means filing Schedule C with your tax return and paying self-employment taxes.
The distinction is critical because business income allows for more deductions, potentially lowering your overall tax burden.
Maximizing Deductions: What Expenses Qualify
Online businesses can deduct legitimate expenses to reduce taxable income. These include:
- Platform Fees: Listing, transaction, and commission fees charged by marketplaces.
- Shipping Costs: Postage, labels, and delivery services.
- Packaging Materials: Boxes, tape, and protective materials.
- Inventory Costs: The cost of items purchased for resale.
- Home Office Expenses: If you use a dedicated space in your home for business, you can deduct a portion of your home expenses.
Casual sellers have fewer deduction options. You can typically reduce taxable profit by your original purchase price (cost basis), but personal losses aren’t deductible.
Navigating Complexity: Where to Get Help
Online selling taxes can be confusing, especially with income from multiple sources. If you’re unsure about reporting requirements or recent IRS changes, professional guidance is essential.
Companies like H&R Block provide tools and services to help sellers navigate these rules, including support for multiple Form 1099-Ks and one-on-one assistance with tax professionals. Even if your sales fall below the reporting threshold, seeking clarity can prevent costly mistakes.
The IRS expects all income to be reported, regardless of whether a Form 1099-K is issued. Ignoring this obligation can lead to penalties and audits.
Ultimately, staying informed and seeking expert help when needed will ensure you meet your tax obligations and avoid complications.
