Auctions and Taxes: What Do You Owe The IRS?
There is a continuing misconception among auction sellers that because online auctions are done over the Internet, there are no taxes to be paid on earnings from them. While this is a wonderful dream to have, you have to remember that we are referring to the Internal Revenue Service (IRS). The one issue to make perfectly clear is that all your earnings from online auctions are most definitely taxable and should be reported on Schedule C of your Federal tax return.
The misconception about online auction earnings and taxes most likely stems from the people misinterpreting the “Moratorium on Internet Taxes” issued by Congress. Unfortunately, this simple catch phrase has been tossed around a lot and this has lead the impression that Internet commerce is not taxed. The truth is that the moratorium on Internet taxes is not a moratorium on all taxes, but one on levying new taxes specifically geared toward the Internet. That means all the taxes that you have come to love continue to be valid. Not only does this include income tax (both federal and state), but also sales tax when the person buying from you lives in the same state as you.
This is why it is vitally important to get your business in order before you start is to sell online. Many people begin auctions as a hobby selling a few things around the house. Before they realize it, they are bringing in a nice second income, but never took the time to keep track of any of the expenses involved. If you take the time to get organized in advance, every single expense related to the business can be deducted against all the earnings. As explained in the Starting A Home Business, many of these expenses are ones that you would be paying anyway even if you weren’t doing the online auction business. Every expense that you can record and document means fewer taxes paid to the IRS, state, local and social security on your part.
For those of you who feel that keeping these records is not worth the trouble or effort, and don’t believe that the IRS will ever know about your online auction income, think again. The IRS is well aware that there are a growing number of people making a significant amount in extra income through online auctions. Furthermore, your entire transaction history is stored on the online auction computers which the IRS can easily access. If you can’t provide evidence of the expenses you incurred related to your auction sales, the government will view 100% as taxable profit. Add in the late and penalty fees and you will quickly find yourself in a position of paying a huge amount in taxes. Creating a simple record keeping system to record all your expenses will protect you from this happening.
By planning ahead and keeping careful and accurate records, you should be able to write off the majority of your auction earnings legitimately through the home business you set up. If you haven’t been keeping any auction expense records up to this point, now is the time to start. The first thing to do is access your records from the online auction company and reconstruct as many of the expenses as you possibly can. Checking past receipts, credit card statements, check and bank statements and online banking histories should help with this. By doing this now, you’ll also put yourself in the position of knowing what important records you need to keep in the future.
The more organized you can become, the more money you will get to keep when April 15th rolls around each year. If after reading this auction guide you have decided to make online auctions into a business, be sure that you treat all aspects of it as a business. This is especially true when it comes to keeping careful records of all your expenses and earnings for tax purposes.