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After the Auction: Reporting Auction Income

Put simply, if you are making income from selling merchandise on online auctions, you've got to report it to Uncle Sam. Believe it or not, e-commerce venues, including eBay and other major auction sites, are on the IRS's radar screen. If you don't want a federal or state bean counter pouring over your books, you better report. Here are some important tips on what data you should keep for your income taxes, how and when you should report, and, best of all, what you can deduct.

Professional Advice
For starters, this information serves as only an introduction. Consult a CPA (certified public accountant) when determining what your tax liability is because of your profits from selling online. Depending on where you live, different county, state, and federal regulations might apply to you. For instance, many states require people to have a business or merchant license to deduct business expenses from their taxes. (See AW's tip on obtaining a business license.) Moreover, you might have to report income generated from an online auction sale as a capital gain, even if you are not in the ''trade of business.''

Report Card
Understand that many banks report to the IRS how much nonemployment-related money an individual deposits. They do this to avoid liability if the IRS tries to prosecute an individual for tax evasion. While this practice has been contested to determine if it's legal, it remains common in the banking industry. It's better to be safe than sorry--report the income you generate.

Capital Gains
If you have ever bought and sold a block of stock for a profit, you know what a capital gain is. The IRS taxes an individual's gain on any capital asset that was sold for more than it was purchased--the cost basis. This can apply to any piece of property, from a share of stock to a classic car to a piece of fine art.

If you are not in the ''trade of business,'' but sell an item for more than it was purchased, technically the profit should be reported as a capital gain on Schedule D, Capital Gains and Losses with Form 1040. Realistically, most personal, nonmerchant auction transactions do not apply. Because of depreciation, personal merchandise usually sells for less than it was originally purchased. In this case, a seller has no tax liability or reporting responsibility. Unfortunately, unlike loses on securities, individuals cannot claim loses on the sale of personal merchandise. No one said life was fair!

File It Away
Though laborious, it's a good idea to file copies of all your auction transactions, as well as keep all receipts related to your sales, including postage, insurance, and packing materials. Finally, track all of your auction site charges, such as listing and final value fees. With this information you will be able to itemize your expenses and make legitimate deductions. (See our tips on starting an auction business, setting up an auction office, and keeping records for guidance on organizing your auction expenses.)

Estimated Payments
Sole proprietors of a business are required to file taxes quarterly (four times a year) as opposed to just once on April 15. If you claim more than $2,500 in business expenses, consider reporting as a business on Schedule C, Profit (or Loss) from Business or Profession, with your Form 1040.

With each filing you must include an estimated tax payment, calculated as a quarter of what you believe your total tax liability will be for the year. The filing dates are April 15, June 15, and September 15. A final return is then required on January 18 of the following year. Happily you don't have to report every auction transaction you completed each quarter. You can give a summary of your profits, calculated by deducting your auction expenses from your gross sales profit. The difference between the two is your estimated taxable income.

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