Although most taxpayers want to pay their fair share of taxes, being unaware of what may be taxable or not can lead to the underreporting of taxable income.
Many people don’t realize that the income earned from auctions and consignment sales, such as e-bay sales, warehouse sales and, in some cases, even garage sales, may be taxable. This article is intended to help taxpayers better understand what income should be reported and the related deductions that may apply.
What is Taxable?
All income from auctions, traditional or online, and consignment sales is generally taxable unless certain exceptions are met. This income is usually considered either “business” or “ordinary” income. In certain circumstances, such income can qualify for capital gain treatment. There are also some exceptions where income can be excluded from taxable income.
Business income resulting from an auction or consignment sale is subject to the same taxes as the income of any other retail or service business. That may include income tax, self-employment tax, employment tax, or excise tax. A retail or service business owner must include this income in his or her business income.
A person must report a gain from a sale whether he or she operates a business or not. A reportable gain is the income above the original cost or basis of the item. These gains may be business income or capital gains.
Income resulting from auctions akin to an occasional garage or yard sale is generally not required to be reported. Generally, most household garage sales result in selling items at a price less than the original cost and therefore leaves no profit to report. Losses from the sale of personal-use items are not deductible. However, there are exceptions. If a garage sale (including online sales) turns into a business with recurring sales and purchasing of items for resale, it may be considered an online auction business.
Some people sell a product or service online as a hobby. This income generally must be reported and deductible expenses are limited. The deductions cannot total more than the income reported and can only be taken if deductions are itemized on Form 1040, Schedule A, Itemized Deductions.
What is a Deductible Expense?
Traditional or online auction and consignment sellers in the business to make a profit can generally deduct expenses that are both ordinary and necessary. An “ordinary” expense is one that is common and accepted for that trade or business. A “necessary” expense is one that is helpful and appropriate for a trade or business. Verifiable auction and consignment fees and commissions are examples of allowable business expenses.
Expenses related to personal, living, or family matters are generally not deductible. For expenses that are partly personal and business-related, only the business portion of the expense is deductible.
If a business is operated out of a home, expenses may be deducted for the business use of the home if the regular and exclusive use requirements are met. Generally, when a person meets the qualifications for an office-in-the-home, he or she can deduct prorated home expenses, which generally include mortgage interest, insurance, utilities, repairs and depreciation. However, the home use deductions are limited to the income from the business.
If you have questions related to income from auction or assignment sales, please call this office.
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Disclaimer: The tax advice included in this newsletter is an overview of some complex tax rules and is not intended as a thorough in-depth analysis of the tax issues discussed. Do not act on the information included in this newsletter without first determining how these issues apply to your particular set of circumstances and if there are any special tax laws or regulations that might apply to your situation.