eBay and Hobby vs. Business

Some time ago, I answered a question posed on eBay Wiki and I've answered several similar questions since in the eBay Auction Listings forum. Since this seems to be a popular topic, I decided to add my Wiki answer to this website.

Basically, the question concerned whether the eBay member should report profits on his income tax return from what he described as a hobby. Here is my answer.

You raise some important issues. First, you say this is a hobby. The IRS basically says hobby revenue must be declared, but that related costs and expenses are not deductible.

Define the term "revenue" as the cash, and market value of goods or services, you receive in exchange for your merchandise (that's right, even the market value of bartered goods and services received must be declared). Profit is what's left over (if anything) after deducting costs and expenses.

If you want to deduct costs and expenses you need to file a Schedule C with your 1040, showing all revenue, costs, and expenses related to your for-profit going concern. Define the term "for-profit going concern" to mean a business operating with a profit motive and the intention to continue operating into the foreseeable future.

Even a part-time business can meet the definition of a for-profit going concern and become eligible for Schedule C treatment.

Individual costs and expenses may be subject to certain tests. Those that pass such tests may be apportioned or limited by maximums or percentages.

Whether your revenue-producing activity is determined by the IRS to be a for-profit going concern or a hobby, the IRS says you MUST claim the revenue on your 1040. The difference is whether the IRS allows you to claim your costs and expenses to offset your revenue (and that can be a HUGE difference).

To get more information, consult expert guides such as those prepared by J.K. Lasser. You can also visit the IRS website at and click on the resources shown on this page and elsewhere on this website.

You may ALSO have to collect and remit sales tax within your state taxation framework, in which case you may be required to get a state sales tax certificate (and you may also have to report for state income tax). Consult your state comptroller's website or contact them directly for additional information. They may have an 800 number for you to call. They may also have a local office you can visit.

Meanwhile, consider the following 3 rules:

RULE #3: Each taxpayer's situation is different. You should consult a paid professional tax preparer such as a tax accountant, tax attorney, or enrolled agent.

RULE #2: Always report all revenue you receive on your 1040, then aggressively pursue all deductions to which you are legally entitled.

RULE #1: Free advice is often worth what you pay for it.