Tax Laws and Issues for Online Auction Sellers
Internet Sales are Taxable
Misinformation about laws such as prohibiting the taxation of Internet access (internet Tax Freedom Act) and limiting sales tax on interstate sales have lead some to incorrectly believe that Internet sales income including online auctions is not subject to income tax.
If you are an online auction seller, you may have tax responsibilities. You may be subject to liabilities for income tax, self-employment tax, employment tax, or excise tax. Your sales may result in capital gains, nondeductible personal losses, or you may have ordinary business income.
Your Online Auction Income from Abroad is Taxable
There have been recent reports about the interest of the Internal Revenue Service (IRS) in taxpayers with offshore bank accounts. The IRS' interest, however, extends beyond offshore bank accounts. The IRS reminds you to report your worldwide income including online auctions sales to foreign customers on your U.S. tax return and lists the possible consequences of hiding income overseas.
If you are a U.S. citizen or resident alien, you must report income from all sources within and outside of the U.S. This is true whether or not you receive a Form W-2 Wage and Tax Statement, a Form 1099 (Information Return) or the foreign equivalents. See Publication 525, Taxable and Nontaxable Income (PDF) for more information.
Consequences for Evading Taxes on Foreign Source Income
You will face serious consequences if the IRS finds you have unreported income or undisclosed foreign financial accounts. These consequences can include not only the additional taxes, but also substantial penalties, interest, fines, and even imprisonment.
Reporting Promoters of Offshore Tax Avoidance Schemes
The IRS encourages you to report promoters of off-shore tax avoidance schemes. Whistleblowers that provide allegations of fraud to the IRS may be eligible for a reward by filing Form 211, Application for Award for Original Information, and following the procedures outlined in Notice 2008-4, Claims Submitted to the IRS Whistleblower Office under Section 7623.
Home Office Deduction
If you use a portion of your home for your online auction business, you may be able to take a home office deduction. In order to deduct expenses related to the business use of your home, you must carry-on a “bona fide” business, as well as meet other specific requirements. Even then, your deduction may be limited. To qualify to claim expenses for the business use of your home, you must meet both of the following tests:
Your use of the business part of your home must be:
- Regular, and
- For your trade or business,
The business part of your home must be one of the following:
- Your principal place of business,
- A place where you meet and deal with customers in the normal course of your trade or business, or
- A separate structure you use in connection with your trade or business.