You need to claim the income.
(1) If it is a"hobby", you claim the income minus your "Cost of Goods Sold" (the cost of the items that you actually sold, but not the cost of the items you have not sold yet). That would be reported as "other income", however you are NOT allowed to claim any other deductions for it.
(2) If it is a "business" and you keep track of "inventory" (which is related to "Cost of Goods Sold"), you claim the income as a business. When you enter the information about your Inventory/Cost of Goods Sold, your current deduction will only be for the items you actually sold (not the items you haven't sold yet). You can also claim any other valid deductions (mileage, commissions, etc.). Because you have not yet received a deduction for the unsold items, you will probably have a profit.
(3) If it is a "business" where you do NOT keep track of "inventory" (which is related to "Cost of Goods Sold") *AND* you claim the "De Minimis" election (go into "assets" to make that election), then you claim the income as a business. Generally, you will deduct the cost of all items as "Supplies". You can also claim any other valid deductions (mileage, commissions, etc.). This will create a loss this year, BUT because you are deducting all items this year, you are very likely to have a profit next year.
