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Selling an item? IRS is waiting

Agency depends on taxpayers' honesty to report all profits

David Milstead, Rocky Mountain News

Published November 6, 2006 at midnight

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You're supposed to be paying taxes.

Anyone with an eBay business is supposed to be reporting profits to the Internal Revenue Service.

And even casual sellers of stuff around the house may owe. But there is no such thing as an eBay W-2.

The site has no obligation to report sales data to the IRS, and the agency doesn't have the power to request a broad-based data dump.

"This is where we have to depend on the honesty of the taxpayer to report these items when they should," says IRS spokeswoman Jean Carl.

The IRS draws a line between operators of a business and those selling "personal use property."

Anyone who acquires merchandise and resells it through an online auction with the intent to make a profit is operating a business, says IRS spokesman David Stell.

The seller needs to check IRS guidance for self-employed small- business owners in Publication 334, which includes lengthy directions on how to value and account for inventory.

"People who have eBay businesses, I've noticed, pay taxes like any other business should," says Colin Wells, who teaches eBay classes as a hobby.

But, "the majority of people I've met have an interest in selling personal items on eBay."

Don't think that because you bought your stuff with your after-tax income, you get a pass on paying income taxes when you sell it.

The IRS' basic guide to income tax, Publication 17, gives guidance in Chapter 14, "Sale of Property."

"Property held for personal use only, rather than for investment, is a capital asset, and you must report a gain from its sale as a capital gain. However, you cannot deduct a loss from selling personal use property."

Wells suspects many personal items sold on eBay are sold for less than what they were purchased for. If so, the seller can't offset other income with the loss - but they wouldn't need to report income, or pay taxes, on the sale.

"A lot of people use eBay to sell items they don't want or have any use for," Wells says.

"That's where the difference takes place, as far as taxes go."

EBay and the IRS: the facts

• Basically, the law says if you sell it, you should pay taxes on it, and anybody with an eBay business is supposed to be reporting profits to the Internal Revenue Service.

• EBay, however, has no obligation to report sales data

• The IRS does not have the power to request a broad-based data dump.

• The IRS says anyone who acquires merchandise and resells it through an online auction with the intent to make a profit is a self-employed small-business owner. Publication 334 includes detailed directions on how to value and account for inventory.

David Milstead is finance editor of the News. He can be reached at 303-954-2648 or .