Question 1 - Gross hobby income equals gross receipts minus the cost of goods sold. You are correct, in that in the past, taxpayers could deduct certain allowable “ordinary and necessary” hobby-related expenses. Now, as a result of the Tax Cut and Jobs Act, hobby expenses are no longer deductible.
The cost of goods sold (COGS) is the sum of all direct costs associated with manufacturing a product. According to the IRS, the following are types of expenses that go into figuring cost of goods sold:
- The cost of products or raw materials, including freight.
- Storage.
- Direct labor (including contributions to pension or annuity plans) for workers who produce the products.
- Factory overhead.
It does not include costs associated with marketing, sales or distribution or shipping fees. Thus, your Ebay fees would not likely be included in cost of goods sold.
Question 2 - If the $21,000 your earned through Ebay was indeed a hobby, report it as such. You can use the first option you referenced in your post. To keep matters simple, calculate your hobby income minus the cost of goods sold, and then enter that net amount as hobby income. You will need to keep records to prove your cost of goods sold because the IRS will get a copy of your 1099-K, and you are correct in that the 1099-K just shows the gross amount without any expenses.
Here is a link to an IRS webpage that discusses hobbies which you might find helpful. It also explains the factors the IRS will use to determine whether an activity is a hobby or a business.
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