DO YOU HAVE TO PAY TAXES ON ITEMS YOU SELL THROUGH EBAY? AN INTERESTING WAY AROUND IT (BELOW), WITHOUT BREAKING THE LAW.

By John W. Schoen
Senior Producer
MSNBC

There’s no such thing as a good time to start thinking about taxes. But with six weeks to this year’s filing deadline, some Answer Desk readers are slogging through their returns. Michael in Maryland is wrestling with the knotty question: do I really have to report everything to the IRS – like the money I make by selling my old stuff on eBay?

I have a very simple question but one in which no one seems to have an answer. I made $2,600 profit on eBay selling old items last year. Do I need to report that income on my tax return? … Ebay does not send out 1099's, so I ask: how would the federal government know what I made selling items on Ebay? They would not. The other point some people have mentioned was it a business or a hobby selling items on Ebay? For me it was a hobby. I did not buy and resell items at a higher price. My tax accountant advised me not to report the extra income. I am interested to hear your thoughts on the issue and what the IRS thinks?
Michael, Randallstown, MD

It is against the law not to report all income to the IRS.

It’s also true that billions of dollars in income go unreported every year. The exact amount, for obvious reasons, is tough to pin down. Much of this unreported income doesn't hit the IRS radar because it comes from sources that don't independently report it -- like wages paid by employers or dividend and interest income paid by banks and investment firms.

To help you stay on the right side of the law, the IRS has come up with all sorts of ways to report this miscellaneous income. If you want to call your eBay venture a hobby, for example, you can only do this as long as you're not pursuing the hobby with the intention of making money. (One test requires that you make no profit from your hobby in two of five consecutive years.) If you do report this as hobby income, you can deduct hobby expenses from your that income. But you can’t use hobby losses to offset other, non-hobby income.

If you call selling stuff on eBay a business, different rules apply, but you can still deduct expenses from your business income. You may not want to go through the paperwork to call it a business, though, if you don't expect to have a lot of profit or expense from future eBay-ing.

The simplest way to report this would be as a gain on the sale of property – provided you had a gain. If the total amount you received for the item is equal to or less than the total cost of buying and selling it, then you had no income. When you calculate a gain on the sale of any property, don’t forget to include all of the expenses associated with the sale when you figure what’s called the ”cost basis.”

For example, say decided to unload that Meet the Beatles LP you found at a tag sale for $5 and sold it for $30. For tax purposes, your cost basis could include the cost of listing it, the gas you put in your tank to get to the tag sale, and any other direct expenses associated with the transaction.

To offset the remaining gain, you could always dig out your sister's old Suzanne Sommers Thighmaster (originally $29.99, 30-day free trial), sell it for $5, and book a $25 loss. And any remaining loss could be applied to the $700 you got for the vintage 1962 Rocky and Bullwinkle lunchbox you found in your parents attic.

Just make sure you keep good records in case the IRS ever asks.