Some items I sold I made money on (more than what it cost to get the item), but others I sold for less (e.g. reselling video games). I understand I only should report the income made on the items where I made an actual profit (first scenario). For the resold video games, can I use those shipping costs as deductions on my return even though I'm not reporting the video games themselves as income? Or do those not count as valid deductions?
For items which you sold for less than what you paid for (at a loss), you cannot claim the loss and do not report the sale. Because the sale is not reported, you cannot deduct the freight you paid for those items.
Hi there! Thank you this is helpful. I have a related question. Let's say I'm selling something whereby I would normally be making a profit on the item (for instance, sold for $15, and shipping cost $3), and let's say this is the case for most items I sell. But then let's say the buyer complained about this particular transaction and I had to refund the buyer, which means in the end I lost the shipping costs. Can I deduct the shipping costs, or still no because I didn't make any income at all from the transaction in the end?
Yes, you can still deduct the shipping costs even if you didn't make any money in the end. Since you are selling on eBay to make a profit and operate as a business, you can enter expenses greater than your income which means you would be operating at a loss. This will lower your total taxable income and tax liability.
Wait a second ... are you just selling personal items you bought for yourself ?
Or are you buying inventory to sell ? If it is the second AND you are doing this for profit then all your inventory counts along with all expenses even if you happen to sell some things at a loss.
Well that's the thing...on eBay, I mostly sold inventory that I bought to sell. But maybe 15% of what I sold was just things I had bought for myself or gifts that I decided to resell. So do I just need to be very clear about my distinction between these 2 categories? In this case, anything in the former category is eligible for deductions, and as for the latter I just treat those as neutral on my taxes (no profit, no deductions, no loss)?
You should not mix business and hobby sales.
Business sales are reported as self-employment income and hobby sales are reported as hobby income.
As champ @Critter-3 says, outgoing freight costs would be included as cost of goods sold in the inventory section of your business.
For hobby income, you can no longer deduct hobby expenses on your federal return so you would not be able to deduct the cost of return shipping. TurboTax includes boxes for hobby income and expenses. TurboTax will carry hobby deductions to your state return in cases where you state allows for deductions.