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Online Auction Taxes - What Do You Owe?

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    Online Auction Taxes - What Do You Owe?

    There is a continuing misconception that because online auctions are done over the Internet, there are no taxes to be paid on earnings from them. While this may be a nice way to think, you have to remember that we are referring to the IRS. The one thing to make perfectly clear is that any 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 arises from the fact that people misinterpret the "Moratorium on Internet Taxes" by the US Congress. While this simple catch phrase has been tossed around a lot and gives the impression that Internet commerce is not taxed, this impression is dead wrong. The moratorium on Internet taxes is not a moratorium on all taxes, but one on levying new taxes specifically geared toward the Internet. All the taxes that you have come to love continue to be valid including income tax and sales tax when the person buying from you lives in the same state.

    This is why getting your business together before you start is so important. 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 haven't been keeping track of any of the expenses involved. If you take the time to get organized in advance, every single expense you have had in regards to the business can be deducted against all the earnings. As explained in the SavingAdvice.com Starting A Home Business article, many of these expenses are ones that you would be paying anyway even if you were not doing the online auction business. Every expense that you can record and document means less taxes paid to the IRS, state, local and social security on your part.

    For those of you who feel that keeping these records is a pain 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 large number of people making a significant amount in extra income through online auctions. Furthermore, all your transactions are stored away in the online auction computers which the IRS can easily access. If you can not show any expenses related to your sales in these online auctions, the government will view it all as taxable profit. Add in the late penalties and you can find yourself in a position of paying much more in taxes than you really need to.

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    By planning ahead and keeping careful and accurate records, you should be able to write off most of those earnings legitimately through the home business you set up. If you haven't been keeping 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. Check receipts, credit card statements and online banking histories should help with this. By doing this now, you will also put yourself in the position of knowing what type of 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. In reading this article you have decided to make online auctions a business. Be sure that you treat all aspects of it that way, especially when it comes to keeping careful records of all your expenses and earnings.

    Copyright Jeffrey Strain and SavingAdvice.com 2003 - 2004, All Rights Reserved. If you find anything inaccurate in this article, please email us. Also be sure to read our disclaimer.

    #2
    Re: Online Auctions and Taxes

    My friend who prepares tax returns told me that there was no need to report income from ebay because there was little chance of the IRS finding out. Why do you say that I have to report it?

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      #3
      Re: Online Auctions and Taxes

      There is a difference between not being caught and what is the law. The law states that you are supposed to declare that income (although if you set up a home business, you'd have to make a good amount before you would need to pay taxes on it). I have no idea what the chances are of you being caught or not, but that is not the point of this section. This section is to let you know that if you do make money with online auctions, you are required by law to report that income.

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