Do You Have to Claim eBay Sales on Taxes?

Hobby or Business Selling
The IRS does recognize a distinction between hobby and business sellers on eBay and compares hobby sellers to people who hold garage sales passing on their own property for prices far less than the original purchase price. However, if you expect to make a profit selling your own merchandise, it transitions from a hobby to a business in the eyes of the IRS.
Reporting eBay Sales
Sales on eBay that are purely hobby sales as defined by the IRS are claimed on the standard IRS Form 1040 as other income. Any deductions related to hobby selling, such as eBay listing fees, Paypal fees, the cost of packaging supplies and actual postage costs are reported in the Standard Deductions section of 1040. Sellers who are considered a business file IRS Form Schedule C, Profit or Loss from Business (Sole Proprietorship), which features detailed income and deduction reporting.
Deductions on Schedule C for eBay Business Owners
If you are a business claiming your eBay sales, then it is important to claim the deductions you are entitled to, as this helps reduce your overall tax burden. Common deductions eBay business owners are entitled to claim include business use of home, business use of personal vehicles, advertising costs, taxes paid, office expenses, legal fees, eBay fees, Paypal fees, shipping supply costs and postage costs. When these are factored into your return, you are left with a net profit that is taxable, instead of having to pay taxes on your total gross sales.
Recordkeeping for Hobby and Business Sellers
If you are either an eBay business or hobby seller, it is very important to keep detailed records concerning both your sales and deductions. Both hobby and business sellers must keep precise records of their total eBay and Paypal fees for the year, as well as postal receipts to prove postage costs. Business sellers should also retain documentation that helps verify the business use of their home and vehicle. A floor plan of a home office area coupled with photographs works well for the business use of home credits and a mileage log is sufficient proof for vehicle credits.
Future eBay Sales
Starting with tax year 2011, eBay's main payment venue, Paypal, is to begin collecting data for a 1099-K tax form. The 1099-K is intended for sellers who surpass $20,000 in gross payments and 200 individual transactions through Paypal. The form is sent to both the income earner and the IRS. When these are sent out in early 2012, midsize- to high-volume sellers are effectively removed from the honor system of claiming eBay sales.