Selling online has become big business. Maybe you sell using Facebook Marketplace, Craigs List, eBay, Amazon, your own website or a dozen other sites. The same basics for taxes apply.
In fact, the income tax laws work the same when you sell online or when you sell in a bricks and mortar store. You may have gain. You may have loss. And, the way you approach the selling, will make a difference in how the tax works.
Let’s start there.
Personal Property Sale
Sometimes people dabble with starting a business by first selling a few personal items online. Or maybe it’s just a matter of cleaning out the garage. When you sell personal use property, generally you’re going to be selling at a loss. You’ll get less for it then you paid. Losses on personal use items is not a deductible expense. You can’t use that loss to offset other income. You don’t need to report it on your tax return.
However, if you do happen to sell a personal use item at a gain, then it would be taxable. In that case, it would be taxable as the capital gains tax rate.
Selling Things You Created as a Hobby
Maybe you’re a person who is “crafty” and you sell items you create on Etsy or other online sites. In this case, the question the IRS would have is whether it is a hobby or a real business. If you sell something just because you like creating art or crafts, then it’s a hobby.
Prior to 2018, you could claim hobby expenses on your Schedule A, Itemized Deduction. You couldn’t take a loss against other income if you have a net hobby loss, but at last you didn’t have to pay income on the sales. You were allowed to net expenses against the income.
The new law doesn’t allow you to take the deduction effective starting with 2018 through 2025. That means that you will have to report and pay tax on income you earn from a hobby and not be able to take a deduction for any of the costs associated with your hobby. You can’t even deduct the cost of the materials used in the items you sell!
The best tax strategy here is to ramp your hobby up to a business for 2018. One more definition to go over and then we’ll look at how to do that.
Online Selling like an Investor
An investor is someone who wants to earn a profit but isn’t really engaged in a business. The idea is that you buy someone that you hope will appreciate and then plan to sell it at a gain. Maybe you collect coins or art; those would be examples of being an investor. When you sell collectables the net capital gains are taxed at a maximum rate of 28% (federal). If you sell at a loss, you can offset the loss against capital gains. And if you have excess capital loss, it can be used up to $3,000 per year. It can roll forward indefinitely.
Online Selling Like a Business
There are 9 factors that the IRS uses to determine if you have a business and not a hobby. This determination has never been more important since the IRS no longer allows you to take a deduction for hobbies. You pay tax on the sales and can’t take any deductions.
These 9 factors break down into 4 categories:
- You run your business in a business-like manner,
- If you have a loss, do you have experience in running a similar business in the past with success? If you don’t have that, do you have a coach, mentor or advisor who does?
- You have put in sufficient time and effort so that it is probable that you will have income.
- You have profit, or a history of profit.
The last one, profit, is the most difficult, but it’s not insurmountable. If you have a business that is clearly being run like a business and you’re building out a brand or other asset, you can have a loss on the books for years. Look at Amazon, for example.
If you’re not sure if you qualify or have more questions on how the Trump Tax Plan will impact your online business, make sure you pick up your copy of “Taxmageddon 2018”. This covers strategies you can use to make sure you get the tax breaks you deserve. You can get your copy at www.Taxmageddon2018.com.
When you have an online sales business, you can deduct all of your business expenses against your business income. You’ll pay federal and state income tax. But you now get a big break if you have income. If you otherwise qualify, you can get a deduction of 20% of the profit. So, let’s say your business nets $50,000, you get a deduction of $10,000. You need to have your business in a pass-through entity like a Schedule C, partnership or S Corporation. And your taxable income needs to below the income threshold of $315K (married, filing jointly) or $157.5K (single).
Also, depending on the type of business entity you have, you may also have to pay self-employment taxes.
Plus, the big tax trap these days is sales tax that you are responsible for collecting and paying. Make sure you read the blogs on this site for more information on sales tax for your online business.