In 2009, $60 billion worth of items were sold on eBay (thank you Meg Whitman). This means that many sellers earned extra money; their activities should have caused them to earn taxable income. The Washington Post has reported that beginning in 2011, a new law will require “the gross amount of payment card (credit card) and third-party network (PayPal) transactions to be reported annually to participating merchants and the IRS.”
Additionally, for 2011 tax returns, taxpayers who sell more than $20,000 worth of goods annually, and have more than 200 electronic transactions will receive a new IRS form, known as 1099-K, for reporting the proceeds. These new tax rules should not be an issue for people who sell just a few small items online for less than they paid for them; the IRS notes that taxpayers generally do not have to report income from auctions that resemble a garage or yard sale. However, if your small “online garage sale” turns into a business with recurring sales and purchases of items for resale, it may be considered an online auction business.
Remember, sales that result in gains are generally taxable transactions, “regardless of whether the taxpayer is conducting a business,” says Gil Charney, principal tax researcher at The Tax Institute at H&R Block. “The real reason behind the law is simple: Research shows taxpayers do a much better job of reporting taxable income when they know the IRS is receiving information about their transactions.”
The best advice that can be given is to KEEP GOOD RECORDS… records income, of cost of merchandise or services sold and of business expenses. If you have a gain report it and if you have a loss… report that too. You will generally report this income on Schedule C of your form 1040.