Deductions & credits

You should not owe income tax on this money presuming that you are selling the items for less than your original cost. However, if you have not kept proper records, and can’t show them to the IRS if audited, you are likely to be hit with a big tax bill.  There was a tax court case a few years ago involving a person who also happened to be an IRS employee, who made large eBay sales and claimed that she was selling personal items at less than her cost. She didn’t have the records to prove it, and ended up being assessed a large tax bill.

If you are only selling items for less than your cost, you technically don’t have to report the income at all. One of your options would be to leave the 1099-k off your return. You would have to file by mail, and attach a copy of the 1099-K and a written statement explaining that you were only selling personal items for less than your original cost and that the income is therefore, not taxable. You would have to be prepared to prove that with an inventory and other records, if you are later audited.

A second way to file would be to include the 1099-k as “other income“, and then create an item of other income that was a negative offset to zero out the income. This would allow you to e-file, but it will almost certainly result in an IRS letter and you would have to then prove again, that you were only selling items for less than your original cost.

A third way to file is to use a schedule C as suggested by the other expert. You would list the sales proceeds from the 1099-k, and then you would list the cost of your inventory to be the same as the proceeds.  You should not list the items’ real cost. If you do, then you will show a business loss which TurboTax would deduct against your other income. But this is not proper if you are only discarding excess personal items and are not actually engaged in a “ongoing trade or business.“  To avoid creating a deductible loss on the business, you would be sure to make the cost of inventory match the proceeds.

A fourth way to report the income would be to report your activity as a “ongoing trade or business“ on a schedule C.  If you have a business, then you report the sales proceeds, and you can deduct your expenses, which includes shipping, transaction fees, and the cost of your inventory. If you have a business, and you have a legitimate business loss, you can deduct this against your other income.  To have an ongoing trade or business, you must be engaged in business activities for a profit motive. This would include doing things like advertising, acquiring new customers, buying and selling inventory, and doing other business-like activities.  This might be the case for example, with someone who starts out on eBay by selling their own used items, but then discovers that they can make money by buying inventory at garage sales and closeout sales and then reselling it for a profit.  It doesn’t sound like you are trying to do this, but I include it for the sake of completeness.  There is also a complication, in that personal items held for more than one year, that are converted to business use, would be treated as capital sales rather than ordinary income sales on the tax return.  I don’t think you are trying to do this, and so you should probably stay away from the whole idea of reporting this as an ongoing trade or business. If you want to do that, you may need to seek professional assistance.

In all of the above examples, you must have accurate and complete records for each item you sell, including the date you purchase the item and the price you paid, or at least the approximate date and approximate price as best you can remember. Finding old credit card statements or old receipts would be very helpful here.  Put together a list, or a spreadsheet, with as much back up documentation as you can find.  If you are audited, you have the burden to prove that you are selling your own personal items at less than your original cost. If you can’t prove this to the auditors satisfaction, you can be assessed income tax based on the amount of the sales proceeds.