The income you get from selling items on eBay is just like the income you get from any other business: it is taxable, at least in theory. In practice, many get away without declaring profits from their eBay sales just because they're hard for the government to track. If you want to be strictly within the law and legit, though, you should be paying tax.

Income is Income.

If you make money from it, then it's income – and if it's income, then it's taxable. There is a question of scale involved, though, where the more you've sold, the more important it is to declare your eBay income. If you don't, you risk getting yourself into all sorts of trouble.

There are some rules for deciding whether your income counts as taxable or not. If you depend on the income you get from eBay, spend a lot of time on it, or just act as if you are running a business, then you need to file a Schedule C tax form and pay tax as a business.

How Do I Work Out How Much to Pay?

The ‘income' you make from eBay is how much profit you make. Remember that you can subtract absolutely all of your costs from this income, like this.

Sale price - cost of item - eBay fees - PayPal fees - cost of postage - cost of packing materials = income.

For example, let's say you sell CDs for $10 each, including shipping. You pay $5 for the CDs at wholesale. That's $10 - $5 (cost) - 25c (insertion fee) - 52c (final value fee) - 30c (PayPal fixed fee) - 29c (PayPal percentage fee) - 37c (stamp) - 50c (packaging) = $2.77 income.

For reference, eBay's final value fee on a $10 item is 5.25%, while PayPal's cut is 30c + 2.9% for most sellers. These numbers will vary depending on the value of what you sell and the kind of account you have.

When you work this out at the end of the year, you can calculate your overall price for all sales, and then work out how much of that you actually received, remembering to adjust for non-paying buyers. Then just subtract what you spent on shipping and packing. There's no real need to do tax calculations on a transaction-by-transaction basis, although it is advisable to keep a printed record of everything you buy and sell.

However, there could be a few advantages to paying tax on your eBay sales – you might be able to make it back through deducting tax on your business expenses. All of the costs in the sum above that aren't profit are business expenses and so tax-deductable. You may also be able to deduct the cost of any computer equipment you buy, as well as ink and paper for your printer. You could even try something a little unusual, like deducting the cost of renting your home office from yourself.

Whatever you do, though, don't just rely on the information in this email. If you want advice about tax issues, you should really go to an accountant.

Another way to make back the money you spend on tax, of course, is to simply make more profit on each item to begin with. Our next email will show you how to get more bidders with the power of pictures.