I Buy And Sell Used Clothing as a Hobby. How do I Define What my Inventory Is?

[leisamp]

I buy and sell used clothing through Paypal using websites like Ebay and Grailed. I don't make enough money or transactions to be issued a 1099K by Paypal. However, I make enough that it definitely should be reported. 

I believe I'm filling out a Schedule C form via TurboTax. However, I'm having trouble valuing my inventory because I don't buy clothing with the intention to resell it. It's more like a hobby. I buy clothing that I like and I eventually sell certain items several years later if I don't like to wear it anymore. I also work in an industry where I receive many clothing items as gifts. Sometimes I keep them, other times I sell them. 

I have receipts that detail the original cost of most of the items sold online through 2020. But I don't know or fully understand what the "value of my inventory" was at the start and end of 2020 because this is a hobby of mine. I don't tally up the value of my entire closet every year. If I get bored of a piece of clothing in my closet, or if it no longer fits, I sell it. Basically, many of my items are pieces of clothing I purchased several years ago with no intention to keep as "inventory" to resell. 

Is the original cost I paid for all the items I sold in 2020 the value of my inventory? Does it matter if the items that I sold in 2020 were purchased in between 2016-2019? Is the total amount I paid for these goods not considered  to be inventory but an expense instead? Do I have to report the money I made off an item that I sold for less than what I originally paid for it? For example: I purchased a T-shirt for $60 in 2016 but sold it for $40 in 2020. 

I know this sounds complicated and maybe I have to talk to an actual accountant to get an answer. But any help will be greatly appreciated! 

[ThomasM125]

In reality, if you don't have a profit motive and are not making a profit then the activity would be considered a hobby by the IRS, and your expenses and cost of goods sold would not normally be deductible under current tax law on your federal tax return. You should then report the income as hobby income and enter your expenses as a lump sum, as they may be deductible on your state income tax return.

You can enter hobby income in TurboTax by following these steps:

1. Income and expenses
2. Less common income
3. Miscellaneous Income
4. Hobby income and expenses

[leisamp]

Hey Thomas, 

Thanks for replying! Although I do consider this a hobby, I've definitely made a profit. Although some items I listed this year sold for less than what I originally purchased it for, they're plenty of items that have sold for more than what I originally it purchased it for. 

Can I still enter this as Hobby income if that's the case? 

[gloriah5200]

You have to make the determination on how you will treat this on your tax return, whether a business or a hobby.  The hobby rules are a little more relaxed, but if you take a deduction for expenses, they cannot exceed the income, just be deductible up to the amount of gross receipts.  Then, as always, you would need to be able to explain that decision if IRS wants to challenge. 

For additional information on hobby income and how to file it on a return, please refer to the following link from irs.gov:

IRS Five Things to Remember About Hobby Income & Expenses

For additional details on things to review when determining if it is a hobby or business, please refer to IRS.gov:

How to distinguish between a hobby & a business

[leisamp]

Still looking for answers regarding how to value my inventory when it's a personal collection of items. 

[SusanY1]

For sales of items from your personal collection, you  value them based on what you paid for them.  Include all costs for purchase including shipping/handling where appropriate.