Money Blue Book

Anyone can make money online with eBay by selling products, but you have to be prepared to put in a lot of time and effort doing manual labor, packaging, and shipping goods. If you are willing to put your back into it, you can easily make quite a bit by buying the most popular consumer products from wholesellers and selling them on eBay. So many people claim to offer wholesale lists on eBay, but don’t even bother with them. Their sources are useless and the majority will try to swindle you. It’s a dangerous world out there so first, a few general rules of caution to abide by that will save you plenty of time, money, and headache. Unfortunately, many people disregard these rules every day, and lose thousands of dollars to scammers.

1) Never Buy Products From Anyone Who Wants To Be Paid By Western Union.

If someone asks for payment by Western Union, do not respond to them and avoid them immediately. Their low priced merchandise might be tempting, but it will almost always be a scam. Remember, it is your own responsibility to verify the reputation and legitimacy of the seller. Western Union is not responsible for the non-receipt or quality of any goods or services.

Common Western Union scams include, but are not limited to the following:

1. Seller asks you to pay by Western Union and tells you that the transaction will be safe because you can make the payment out to someone you know, but put the seller’s address on the payment. You are then instructed to tell the seller the money transfer control number (MTCN) of the payment so he can go to Western Union and verify that you have made the payment. Once you receive the shipment, you are then supposed to contact Western Union and change the payment recipient’s name to the seller’s real name so that the seller can pick up the money. It’s a scam everytime because once the seller knows the address or the control number, he can obtain the payment with no problem. Many Western Union agents in foreign countries never ask for proper identification.
2. Seller asks you to pay by Western Union and tells you to make the payment using Western Union’s secret question feature. The way this feature works is the Western Union agent will ask a secret question to whoever is picking up the money, and the person picking up the payment must answer correctly in order to collect the money. It’s a scam everytime because many times Western Union agents, particularly those outside of the United States, do not ask the question, and only care if the person knows the address or control number. Western Union even advises on their website not to rely on the secret question feature.

2) Never Use An Escrow Service Other Than Escrow.com

Escrow is verified and recommended by eBay. Note that Escrow.com will handle transactions in any country in the world, except Romania and Indonesia. Fraud is so rampant in those countries that Escrow.com cannot effectively and safely help you transact with sellers in those countries. What Escrow.com does is ask both the buyer and seller to agree on terms. The buyer must then send the required funds to Escrow.com. Once Escrow.com receives the funds, they notify the seller to ship the goods. Once the buyer receives the goods and confirms that everything is in order, the buyer notifies Escrow.com to release the funds to the seller.

Escrow.com is safe for both buyer and seller because the buyer does not have to release the funds to the seller until they receive shipment and verify everything is correct. It is safe for the seller as well, because even if a buyer claimed non-receipt of the shipment, the seller could provide Escrow.com with the tracking number for the shipment and a shipping manifest showing what was sent and received. In which case, Escrow.com would then release the funds to the seller.

Common Escrow Scams Include, But Are Not Limited To The Following:

1. Seller tells the buyer that they prefer an escrow company other than Escrow.com. The seller gives the buyer the website address of the escrow company they prefer, and indicates that this is the only escrow company they trust. The buyer goes to the website and discovers a cleverly designed site that looks legitimate, with promises of safety and security. It’s a scam because the website is actually owned and operated by the seller or the seller’s associate. Once the buyer sends their money to the so-called escrow company, they will have actually sent their money straight into the hands of the scammer.
2. Seller tells the buyer that they will do the deal securely through SquareTrade.com. It’s a scam because SquareTrade does not act as an escrow service. They do not approve deals or hold funds for anyone. All SquareTrade does is allow eBay sellers to place a SquareTrade seal on their auctions, which shows that the eBay seller is willing to allow SquareTrade to help resolve any future disputes. Anyone who claims that they will use SquareTrade like an escrow service is a fraud. The seller may even send the buyer a spoofed e-mail, one that looks like it came directly from SquareTrade. However, it will be a fake.
3. Seller tells the buyer they will use a shipping service called TNT, and that the buyer should send their payment to TNT, in which case TNT will hold payment until they can inspect and ship the seller’s merchandise to the buyer. It’s a scam because TNT is a shipping company and not an escrow service. They do not hold funds or inspect shipments on anyone’s behalf. The seller may even send the buyer a spoofed-mail, one that looks as if it came directly from TNT, complete with logo and tracking number for the shipment. However, the e-mail will be a fake.

3) Always Request That You Pay A Seller By One Of The Following Methods

1. Credit Card – Safe because most credit card companies will refund your money if you file a proper fraud complaint.
2. Escrow.com – Safe because it protects both buyer and seller, as mentioned in Rule # 2.
3. PayPal – Usually safe for purchases under $2,000, because PayPal will let you use a credit card and will verify the seller’s address, banking information, and identity (do not send money to someone through PayPal if they are listed as “unverified”).
4. Letter of Credit (LC) – Basically, this is like using your bank as an escrow service. For example, you can go to your bank and apply for a letter of credit for the dollar amount you need to pay the seller. Your bank will freeze the funds in your account, and issue a letter to you and the seller’s bank verifying that they are holding the money and that they will transfer the funds to the seller’s bank account as soon as delivery of the goods to you is confirmed.

Do Use Bank Wire Transfers Until Identity Has Been Verified and Confirmed

Be very careful with any seller that requests payment in advance by T/T (telegraphic transfer), also known as bank wire transfer. This is a tricky gray area because some legitimate international sellers do require money by T/T in advance. Sometimes it is for a deposit, and sometimes they want the full transaction amount. Before sending money by T/T, make sure you ask for the following:

1. Seller’s full name,
2. Seller’s address,
3. Seller’s telephone number,
4. Seller’s company name,
5. Seller’s business license number,
6. Seller’s bank’s name and telephone number,
7. A scanned or faxed copy of the seller’s identification card or driver’s license,
8. References from companies the seller has worked with before, preferably in your country.

Tell the seller you need this information to run a thorough background check. You can then use a service such as Intellius.com to run a background check on them. You can also hire an international buying agent in the seller’s country to go to the seller’s physical location and buy the items for you in person, and then ship them to you. Most buying agents will charge a reasonable fee to securely buy for you.

Remember, if the seller is legitimate, he will understand your need for verification and will comply. If the seller hesitates, resists, says he cannot delay anymore, or demands that you send payment as soon as possible, you should become very suspicious and perhaps reconsider the transaction. The seller is very likely a fraud. Do not let greed or haste overcome your common senses.

4) To Assure Sellers That You Are An Honest And Legitimate Buyer, You Should Become Verified

1. Obtain a DnB (Dun & Bradstreet) number. This can be accomplished by applying for a credit builder account at dnb.com. Dun & Bradstreet will verify your company information including company name, address, owners, and ongoing debts (credit cards) or lines of credit.
2. Get PayPal Verified – Open a PayPal account. Once you have one, apply to become a verified premier member. PayPal will verify your address and identification by depositing two small amounts of money into your bank account or credit card. Afterwards, you must verify the total amounts that were deposited to prove that you are the owner of the bank account or card.
3. Get an Alibaba Trustpass Membership – See the list of wholesale sources below for more information.
4. If you are in the United States, become a member of the Better Business Bureau Online.

5) Verify The Seller’s Identity

If a seller tells you that he or his company has a website, run a WhoIs check on the website to see if the seller’s name and address match the internet registrar’s record for the site owner. Beware of anyone who doesn’t have a name and address listed in the WhoIs section of their domain, or of anyone who just recently registered the domain.

6) Develop Your Own Private List Of Trusted Wholesale Suppliers

1. Worldwide Brands – Worldwide Brands carries over 4,000 products and they also provide drop shipping services. That means they can ship products directly to your customers, and you do not need to keep any inventory or perform any shipping. They are an eBay Certified Solution Provider, and they are also a member of the Better Business Bureau.
2. NAWCA – (North American Wholesale Co-Op Association) is another fantastic source for over 100,000 products via their 2,000 distributors, many of which can perform drop shipping for you. The NAWCA was founded by a collective of wholesalers and distributors in 2001. Highly recommended for eBay sellers.
3. Ingram Micro – Ingram Micro is the second largest electronics distributor in the world. They offer very good pricing.
4. Tech Data – This company operates a huge electronics distribution center in the United States.

Buyer and Seller Community Portals - There are excellent wholesale deals to be had here, but because these sites are part of the unregulated wild, wild west of international wholesellers, you have to be extra careful and vigilant in sorting the diamonds from the rough. There are definitely more scammers here than legitimate sellers. Be careful:

1. Alibaba – Alibaba is a well trafficked source for wholesale buyers and sellers to connect on the internet. You should check this site frequently and sign up for trade alerts for whatever you are buying or selling. Your priority should be to deal with Alibaba companies that are Trustpass verified, although that in of itself is not always a sure guarantee of reliability. You can also become an Alibaba Trustpass member yourself. For a small fee, Alibaba will have a third party credit agency contact you to verify your name, address and company identity. Once you are an Alibaba Trustpass member, you will have more credibility, and sellers and buyers alike will take you more seriously. However, do note that scammers are everywhere. Please read my personal scammer experience for more insight.
2. Exporters Singapore – Similar to Alibaba, but this site requires all members to pay a fee after a 30 day trial period. This method helps to keep scammers out.
3. Power Source Online – Power Source Online is a computer parts trading exchange for dealers, brokers and services companies. You can find cheap computer parts and components for resale.

Note: The rest of the communities listed below are similar to Alibaba, with less traffic, but it is advised that you review and join as many as possible to maximize your opportunities.

1. Global Sources
2. EC 21
3. Rusbiz
4. EC Plaza
5. Importers
6. Trade India
7. Offer 21
8. Fuzing

As I may have mentioned before, I’m a recovering attorney – and a fairly young one at that (I’m in my late 20’s). Right now I’m in the process of working at home on my online blog and business ventures for a few months before returning back to my full time work as a contract attorney.

So how did I end up doing this type of work instead of using my law degree to pursue a so-called real legal career? Sometimes I ponder about what my dream job might have been had I not gone to law school, since it wasn’t my passion in life to begin with. My decision to attend graduate school was more due to process of elimination. I started out college on the pre-med track to become a doctor, did well in my studies, got bored with chemistry and biology, and eventually shifted gears into computer science. I loved taking programming theory and practice courses and did very well, but after a few semesters, I decided that I couldn’t see myself stuck as a computer programming nerd – so I moved on (how ironic, now that I’ve come full circle again). So then I decided to go the business route and major in finance. After a few more semesters during which I did pretty well, I pondered what else was out there. However, by then I had enough college credits to graduate and my parents were beginning to wave the tuition baton, “encouraging” me to move onto bigger and better things. After looking around, I decided I wasn’t ready to financially support myself just yet. So I took the LSAT exam and sent in my application to a few top tier law schools. Before I knew it, I was attending the state law school and working my way through civil procedure, contracts, and criminal law classes.

Going The Law School Route – But Still Not Sure Where I Wanted To Go Professionally

One thing that I noticed during law school was how incredibly math-adverse law students are. I suppose that’s why they all chose to attend law school to begin with – to avoid having to deal with mathematics or anything related to numbers. However, it just so happened most of my law school friends were of the opposite persuasion – they were mostly into tax law, a legal field riddled with numbers and statistics. I wasn’t particularly fond of all the math involved, but I went with the herd and ended up taking most of the tax law courses available – everything from individual tax planning and corporate tax, to the most difficult law school course I ever took – partnership tax.

After law school I worked for a trial judge and later when on to work for the federal government as an associate attorney for a year or two. After another very short stint working for a crazy female cougar attorney (I’ll share that story one day, as it was a very eye opening experience, but for all the wrong reasons), I ended up choosing to work for myself. After starting up a few profitable blogs such as the personal finance blog you are reading right now and another law related one, I now work as a contract attorney on the side when I’m not working from home. I receive most of my contract attorney assignments from staffing agencies that place me on legal projects that last anywhere from a few weeks to several months. The job description usually entails very simple duties such as legal document review and mindless legal tag coding. Many dread performing contract lawyer work, but the work provides very lucrative pay without the heavy responsibilities (I often refer to it as my “stripper pay”). It’s perfect for my lifestyle at the moment since I don’t want my full time job to hinder the time and effort I devote to my personal small business operations.

The great thing about contract attorney work is that it is extremely stress-free and unlike a traditional lawyer job, my responsibilities and duties end at the end of the day. I never have to run into the office after work or cut a weekend short to file a legal brief or prepare a memo. However there are long term drawbacks to this line of short term work. The biggest downside is that the work is only temporary and isn’t career track oriented. With temping, while meals and transportation are frequently reimbursed, you usually don’t receive any health benefits or job security. But then again, in this day and age as well as economy, do any of us truly have solid job security anymore, or even guaranteed health benefits? The other downside with legal temping is the lack of professional development. However, I simply cannot see myself pursuing the traditional attorney path anyway. Lawyers notoriously burn out fast and work tremendous hours that ultimately take a terrible toll on their health, family wellbeing, and lifespan. Plus, legal employment prospects for attorneys isn’t what it used to be as the market has become extremely saturated. Almost anyone with half a functioning brain can go to law school these days as there are no significant barriers to entry or pre-requisites that need to be overcome to apply. Especially in a major city like Washington DC, you can’t walk in any direction without bumping into a lawyer. It’s utter and complete saturation.

Looking To the Future – Sacrificing Some Income Now To Build Up My Online Blog Businesses and Incubate My Other Real World Ventures

Thus, I’ve come to realize that the key to building wealth and reaching financial prosperity is to build up multiple streams of alternative and passive income, apart from your primary full time employment. Otherwise, you simply run the risk of living your entire life trading hours for dollars. Passive income generation through methods such as blog income or stock market investing help to get around the finite time problem by allowing you to generate income even when you are not actively sitting and working at your office desk.

However, I don’t regret going to law school at all. I was prudent to have attended a state school with relatively lower in-state tuition, and I was very fortunate to have been able to consolidate my student loans at a very low fixed interest rate. My college loans are all paid up and my graduate school loan payments are thankfully quite manageable. Other than tuition issues, law school prepared me for the future by teaching me how to more aggressively and confidently combat conflicts in the legal and business world. Overall my finance, tax, and legal background has helped me to better improve my personal finance blogging tasks, as well as enhance my non traditional legal pursuits. I knew after law school that I didn’t want to pursue the traditional law firm job path since I had a passion for entrepreneurship and running my own business. When I discovered how to make money blogging and developed the ability to tap into the limitless potential of online business income, I knew I had found my calling. It’s a key component part of my solution to end the 9-5 workweek cycle, and the reason why I’m currently sitting at home right now tinkering on the computer instead of collecting a steady paycheck at a stressful full time lawyer position or even at a contract attorney gig.

For now, I plan to only take a short time off to work on my ventures full time as I currently am not yet able to live off of my online income alone. Perhaps that day will someday come, but for now, I plan to return to my legal contracting job after a month or two off. Obviously I don’t see contract attorney work as the future for me since the profession is inherently unstable, unpredictable, and projects do tend to dry up during recessions and slow economic periods. I merely see it as a necessary means to an end for now. Meanwhile, I also realize that by taking a few months off I am forfeiting a substantial amount of contract attorney pay to spend time building my passive income businesses, but I think in the long run and even in a few years from now, the short term financial sacrifice will pay off. The amount of money I am losing by not working full time is quite substantial however. Contract attorneys in my area get top wage rates of $35 an hour with time and a half of $52.50 per overtime hour worked past 40 hours. My contract projects usually require that I bill around 50 or so hours, which comes to a weekly income of $1925.00. I’ve worked at least one extremely time demanding project before in the recent past, during which I worked and billed 96 hours a week for a span of one month. The work was a simple breeze, but the hours were brutal. Of course during that time, I earned $4,340.00 per week before tax. I guess it speaks highly of how much potential I see in online and passive income businesses that I would forsake that wage income now.

Business credit cards have grown to become a commonly accepted and practical way for small startup businesses to acquire access to needed venture credit. Not only do they offer benefits unique to business office and supply demands such as higher credit lines, better credit card rewards, and more versatile expense tracking, they offer also the opportunity for growing businesses to build up their business credit history. This is important because one day the business may need to draw upon that developed business credit history to acquire corporate loans.

Individuals Can Apply For Business Credit Cards With Their Social Security Numbers

What many consumers seemingly overlook is that business credit card benefits can be available to them as well and are not reserved for complex business entities alone. Card applicants don’t have to be part of a corporation or a limited liability company (LLC) to qualify. Ordinary individuals can go into business for themselves and establish their business operation as a sole proprietorship. If you are self employed, a freelance worker, or an independent contractor like myself, you may very well be operating as a sole proprietor already. In the eyes of the Internal Revenue Service (IRS), the government, and credit card companies, the individual and his or her sole proprietorship business are one and the same for legal and income tax purposes. The only significant difference is when it comes to record keeping and business tax deductions. As sole proprietorships are entitled to write off their business expenses against their income, most are encouraged to apply for and utilize an Employer Identification Number (EIN). This federal tax ID allows the sole proprietor to more easily keep their personal and business expenses separate so that business transactions can be more properly distinguished and categorized for tax deduction purposes. Having a separate Employer Identification Number apart from the individual’s personal Social Security Number (SSN) also allows the individual to apply and obtain credit lines separate and distinct from his own personal credit history.

For ordinary consumers interested in taking advantage of the many benefits of business credit cards but aren’t interested in actually writing off any business deductions, so long as they properly pay off the balance each month, they won’t have to put up with any extraneous IRS tax filing obligations. Other than the introduction of a separate business credit line for the sole proprietorship or company applicant, the differences in usage between consumer and business credit cards are fairly minimal.

Business and Personal Credit History Scores Are Reported and Recorded Separately

While they may be taxed as income generated from the same source, the sole proprietor and his or her business entity are treated separately for credit recordation purposes. Their credit histories and credit scores are not intermingled or consolidated when it comes to reporting credit transactions to the credit reporting agencies. In fact, the way they are reported differ as well.

Business credit scores range from a scale of 0 to 100 with 75 generally regarded as an excellent credit rating (example of a business credit report). Some agencies even report their own metrics such as Dun & Bradstreet (DnB), which reports its own Paydex score regarding the likelihood of credit delinquency. There are different types of scoring methods used for personal credit scores as well, but the most popular one is the FICO score, which ranges from 300 to 850 with 700 regarded as excellent. Both business and personal scores along with their accompanying credit history attempt to reflect the individual or business entity’s credit worthiness based on past and current credit lines, credit inquiries, and history of paying back outstanding debt.

Even With An EIN, Business Credit Card Applications Usually Require SSN’s As Guarantees

A true business or corporate credit card is a line of credit that is offered solely under the name of the business entity with all activity reflecting only on its own business credit history through business credit reporting agencies like DnB, Equifax, and Experian. However, the vast majority of online business credit cards still require that the business card applicant provide a personal guarantee for business credit liability. That is why card issuers almost always still ask for both a business tax ID as well as the Social Security Number of the person applying for the card. There are ways to obtain a business credit card through local banks and major card issuers using only a EIN without the need of a SSN, but those types of cards are strictly limited to established businesses that have developed and extensive credit histories. Thus, unless your sole proprietorship has a long standing and proven credit rating with a major business credit reporting agency like DnB, you will be required to associate your SSN as a guarantee for unpaid debts.

How a business card application will impact the respective business and personal credit reports depends on the card issuer’s policy, but in the vast majority of cases, an initial and one time hard credit check is applied against the applicant’s personal credit history like any consumer credit card would for approval purposes. While the inquiry itself will show up on the personal credit report, the business credit card balance and credit line will not. This hard credit inquiry is only for the initial approval. Subsequent business credit activity will be recorded on the business’ separate credit history report solely, unless there is something like a missed payment. Because most online business credit cards are backed by the cardholder’s personal credit and linked by his or her personal SSN, in the event the business entity enters default such as by filing for bankruptcy, the default may be reported on the personal credit report. But in general, business credit activity is kept separate from the associated personal credit file. This is the case for all major business credit card issuers like Citibank, Chase, and American Express.

However, despite the association of the applicant’s SSN with the business card as a guarantor, so long as the card payments are made properly, there is no business credit balance or credit usage impact on the individual credit history report other than the initial application inquiry hit.

Applying For A Credit Card With Just A Business Tax ID, Without A Social Security Number

For various reasons, including wanting to keep a pristine personal credit history report, or fear and paranoia about identity theft, some card applicants may seek to apply for a consumer or business credit card with just a business tax ID, without having to provide a personal SSN as a liability guarantor. Unfortunately that is not possible with the majority of online credit card offers. With regular consumer credit cards, attempting to replace the SSN with an EIN on the card application will likely result in a rejection letter as well.

I used to sell products on eBay as a money making hobby and even once attempted to make a side business out of it. It wasn’t easy trying to make profit while at the same time avoiding all the internet fraud and scams out there. While I eventually decided to pursue other ventures, I had a friend who continued to dabble in eBay auctions. Soon enough, he had successfully turned what started out as a one room operation to an impressive one man eBay business machine that engulfed his entire basement. Everytime I stopped by his house I was always startled at the sheer number of brand new Dell laptop and ThinkPad boxes stacked in piles throughout his basement that overflowed into his unoccupied garage.

Through his closely guarded network of online connections (he never disclosed them to me), he was able to secure excellent wholesale deals on hot electronics like laptops, desktop computers, and handheld PDA’s for sale on eBay. His racket continued for several years to my continued amazement as I wondered how he managed to stay so consistently profitable despite rising eBay fees and heavy online competition. One day I finally turned to him and asked him if he was reporting his eBay earnings as taxable income on his federal income tax. He simply smiled and changed the subject. Obviously, the answer was no, thus exposing the secret to his profitable eBay success – tax evasion!

Frankly I don’t really blame him for withholding his eBay profits from the Internal Revenue Service (IRS), although I wouldn’t have done that myself. The subject of eBay tax enforcement has been murky for years, mostly due to the lack of proper paper trails and the undeveloped legal area of online auction income. However, the IRS has been recently making moves to crack down on eBay powersellers and auction proprietors to compel the reporting of all business profits. The IRS has also set its taxation efforts on other popular online auction sites like Amazon and UBid, as well as other online hobby market networks like Etsy. I suppose it was about time the almighty IRS dealt with the issue of online auctions.

The IRS Struggles To Compel eBay Sellers To Divulge Their Taxable Earnings

When it comes to reporting their sales income to the IRS, eBay sellers currently operate on the honor system. However, this honor system has resulted in a significant shortfall of under-reported and untaxed auction earnings. Currently, eBay does not report seller stats or submit sales records to the IRS unless it is honoring a subpoena request for information. Many amateur and aspiring eBay entrepreneurs have been able to work the eBay tax loophole for some time and avoid having to pay tax on their profits. It’s a risky game of tax evasion roulette, but the lax enforcement has allowed it to persist for some time.

Recently, the federal government and the IRS has begun to put pressure on major online auction retailers like eBay to cough up user information and sales records, and has even introduced legislation to require market hubs to report personalized sales activity. Of particular taxation concern are the millions of auction sellers who consider eBay as their primary or secondary source of income but fail to accurately report their earnings. Obviously this effort is going to encounter much resistance from sellers and even the auction sites themselves since new tracking policies will undoubtedly result in higher tracking and record keeping costs. The prospect of requiring sites like eBay to track user information based on individual Social Security Number will obviously have the usual online privacy advocates up in arms.

While this taxation crackdown may bug a few eBay sellers, the requirement to report auction income and taxable business earnings is nothing new and has always been around. It’s just only until recently that the IRS finally decided to work harder at plugging up the tax gap to stem tax evasion activities. Mandating the implementation of tools to enforce tax compliance already exists in most employment sectors and the IRS believes the new frontier of online auctions should be no exception.

When Do Proceeds From An eBay Auction Sale Have To Be Reported As Taxable Income?

From the amateur seller who considers eBay to be nothing more than a hobby, to the heavy traffic Powerseller who runs his or her operation as a profit generating business, no one really wants to spent the time to report earnings as income if he or she can help it. However, the IRS instructions make it clear that all sources of income can be taxed, which includes everything from online auction profits, and income from gambling activity, to even illegal “business operations” such as drug dealing and prostitution.

Even if the eBay seller makes a few sales here and there as a hobby, the IRS requires all income to be reported – this includes wages, salaries, tips, gambling winnings, money found on the floor, sweepstakes earnings, business income, and yes, eBay earnings (both hobby and business). The hobby or business nature of your eBay income only becomes an important factor when determining whether your eBay losses and operation costs may be used to offset your eBay income as a business deduction.

The correct question to ask regarding taxability is not necessarily the frequency or dollar amount of the transactions – but rather – did the eBay auction activity result in a net profit? For those who use eBay or other internet auction sites to sell old stuff that’s been piling up in your garage, you probably don’t have to worry about paying income taxes on the proceeds since the cost (the basis) usually exceeds the selling price. Under current tax law, an individual who sells an item online and collects more money than its original purchased value is expected to report that money as income on his or her tax return. Items whose original purchase basis value cannot be determined is typically valued at $0 under current tax law. Thus, it’s advisable for all eBay sellers to get in the proper habit now of retaining their purchase and sales records. You never know when the IRS will flip the switch and go nuts with the eBay seller tax audits. It’s only a matter of time.

Why Does It Matter If Your eBay Selling Is A Hobby Or A Business?

All eBay online auction sellers have a duty to report their earnings and to comply with tax law obligations to avoid an IRS audit. For most casual eBay hobby sellers who occasionally run the online equivalent of the garage or yard sale, they usually are not obligated to report their sales. That’s because for most online garage or yard type sales, the items sold are usually personal household items purchased over the years and used. As such, the resulting selling prices are almost always lower than the original purchase basis price. The exception occurs when the item for sale has appreciated in value. Even if the transaction was intended to be a simple online yard sale, if the item being sold was something like a set of rare baseball cards that had appreciated in value in excess of the original purchase price, the resulting earnings must be reported as taxable income.

The hobby vs. business debate matters when it comes to self employment tax obligations and tax deduction benefits. If the eBay operation is properly regarded as a business, the taxpayer may be entitled to business deductions to write off operating costs. Whether the eBay seller will be treated as running a business will depend on his or her intent to generate profit. Activities such as visiting pawn shops for resale bargains like my friend used to do will likely be seen as demonstrating business intent. Furthermore, when the individual is running a business operation that results in regular profit sales, he or she may also be obligated to pay self assessed quarterly estimated tax payments through Form 1040-ES.

If you lose money pursuing a hobby, you cannot deduct your hobby loss from other income, but you can deduct your expenses up to the amount of your hobby income on your tax return. A hobby loss is a miscellaneous itemized tax deduction, and as such, only the total that exceeds 2% of the adjusted gross income may be deducted.

For more information regarding the differing IRS treatment of hobby and business related activity, check out the IRS explanation. The IRS also provides a good tax information resource for online auction sellers.