The Tax Reality of Reselling
If you’re making money reselling, you have tax obligations. The IRS considers reselling a business activity, and like any business, you need to track income, claim legitimate deductions, and potentially collect sales tax.
This guide covers the fundamentals every reseller needs to understand. Note: this is educational information, not tax advice. Consult a qualified tax professional for your specific situation.
Income Reporting Basics
When Does Reselling Become Taxable?
From the first dollar. The IRS doesn’t have a minimum threshold where income becomes taxable. If you sell items for profit, that profit is income.
However, selling personal items you’ve used at a loss (garage sale scenario) isn’t taxable income—you’re just disposing of personal property below your purchase price.
Platform Reporting (Form 1099-K)
Platforms like eBay, Amazon, and PayPal/Venmo report sales to the IRS via Form 1099-K when you exceed:
- $600 in total sales (current threshold as of 2024)
If you receive a 1099-K, the IRS knows about those sales. Not reporting them is a red flag.
Hobby vs. Business
The IRS distinguishes between hobbies (occasional activity, not primarily for profit) and businesses (regular activity conducted for profit).
Business indicators:
- Consistent sales activity
- Profit motive (you’re trying to make money)
- Business-like record keeping
- Time and effort invested
Most regular resellers are running a business, not a hobby. This is actually advantageous—businesses can deduct expenses; hobbies have limited deduction options.
Calculating Taxable Income
The Basic Formula
Revenue (total sales) Minus: Cost of Goods Sold (what you paid for inventory) Minus: Business Expenses (operational costs) Equals: Net Profit (taxable income)
Cost of Goods Sold (COGS)
COGS is the direct cost of items you sold:
- Purchase price of inventory
- Shipping costs to acquire inventory
- Costs to prepare items for sale (cleaning supplies, repairs)
Critical: Only deduct COGS for items actually sold. Unsold inventory remains an asset.
Tracking Inventory Cost
Methods for tracking what you paid:
- Specific identification: Track actual cost per item (best for unique items)
- FIFO (First In, First Out): Assume oldest inventory sells first
- Average cost: Use average cost across inventory
Pick a method and use it consistently. Specific identification is often easiest for resellers.
Deductible Business Expenses
Common Reseller Deductions
Shipping and Packaging:
- Postage and shipping fees
- Boxes, mailers, tape
- Packing materials
- Shipping software subscriptions
Platform Fees:
- eBay/Amazon selling fees
- Payment processing fees
- Store subscription fees
Technology:
- ListForge subscription
- Other software tools
- Portion of phone bill (business use only)
- Computer equipment (depreciated)
Supplies:
- Photography equipment
- Lighting, backgrounds
- Measuring tools
- Cleaning supplies
Transportation:
- Mileage to sourcing locations (thrift stores, estate sales)
- Shipping trips to post office/carriers
- Keep a mileage log
Home Office:
- Dedicated space for business operations
- Proportional share of rent/mortgage, utilities, insurance
- Strict IRS rules apply—research carefully
Professional Services:
- Accounting/bookkeeping
- Tax preparation
- Business legal services
Non-Deductible Expenses
- Personal clothing (even if worn for business)
- Commuting to a regular job
- Entertainment and meals (limited deductibility)
- Inventory you didn’t sell (still an asset)
Self-Employment Tax
The 15.3% Reality
As a self-employed reseller, you pay self-employment tax on net profit:
- 12.4% Social Security (on first ~$160K)
- 2.9% Medicare (on all earnings)
This is in addition to regular income tax. Combined, effective tax rates for self-employed individuals often exceed 30%.
Quarterly Estimated Taxes
If you expect to owe $1,000+ in taxes, you’re required to make quarterly estimated tax payments:
- April 15
- June 15
- September 15
- January 15
Underpaying results in penalties. Calculate estimates based on expected profit or prior year’s tax.
Sales Tax Obligations
The Nexus Question
You may need to collect sales tax if you have “nexus” (connection) in a state. Nexus can be created by:
- Physical presence (living, operating, warehousing)
- Economic presence (sales exceeding state thresholds)
Platform Collection
Good news: major platforms (eBay, Amazon) collect and remit sales tax in most states on your behalf for marketplace sales. You don’t need to separately calculate or remit.
Direct Sales
For sales outside major platforms (your own website, local sales), you may need to collect and remit sales tax yourself if you have nexus.
Resale Certificates
If you buy inventory from wholesalers, a resale certificate exempts you from paying sales tax on purchases—you’ll collect it when you sell to end consumers.
Record Keeping Requirements
What to Keep
For every purchase:
- Date
- Source (store name, address)
- Items purchased
- Amount paid
- Receipt (photo is fine)
For every sale:
- Sale date
- Platform
- Item sold
- Sale price
- Fees paid
- Shipping costs
For expenses:
- Receipts or records
- Business purpose documentation
- Mileage logs with dates, destinations, miles
How Long to Keep Records
IRS can audit up to:
- 3 years for standard audits
- 6 years if income underreported by 25%+
- Indefinitely for fraud
Keep records at least 7 years to be safe.
Tools for Tracking
Options:
- Spreadsheets (basic but functional)
- Accounting software (QuickBooks, Wave)
- Dedicated reseller tools
- ListForge inventory tracking
Pick a system and use it consistently. Catching up at tax time is painful.
Business Structure Considerations
Sole Proprietorship
Default structure for most resellers:
- No formal registration required
- Report business income on Schedule C
- Personal liability for business debts/issues
Works for: Most resellers, especially those starting out
LLC (Limited Liability Company)
Benefits:
- Liability protection (personal assets protected from business issues)
- More professional appearance
- Potential tax flexibility
Considerations:
- State registration fees
- Annual compliance requirements
- Still pay self-employment tax (in most structures)
Works for: Resellers with significant revenue, inventory, or liability concerns
S-Corporation
Advanced structure with potential tax benefits:
- Can reduce self-employment tax through salary/distribution split
- More complex requirements
- Not worth it for most resellers until significant profit levels
Works for: High-revenue resellers (typically $100K+ profit) with professional tax guidance
When to Get Professional Help
Signs You Need a CPA/Tax Professional
- Revenue exceeding $50K annually
- Multi-state sales tax questions
- Business structure decisions
- Audit situations
- Complex deduction questions
Finding a Good Professional
Look for:
- Experience with small business/self-employment
- Understanding of e-commerce and reselling
- CPA or Enrolled Agent credentials
- Reasonable fees for your situation
Common Mistakes to Avoid
Mistake 1: Not Tracking COGS
Every item you sell had a cost. If you can’t prove that cost, you can’t deduct it.
Mistake 2: Missing Deductions
Keep receipts for everything business-related. Small expenses add up.
Mistake 3: Ignoring Quarterly Taxes
Surprise tax bills in April with penalties are painful. Pay estimated taxes.
Mistake 4: Mixing Personal and Business
Separate bank accounts and credit cards make tracking easier and help prove business status.
Mistake 5: Assuming Platforms Handle Everything
Platforms report income—they don’t track your expenses or calculate your taxes.
Action Steps
- Start tracking now: Set up a system for income and expenses
- Open a business bank account: Separate business from personal
- Save for taxes: Set aside 25-30% of profit for taxes
- Make quarterly payments: If you’ll owe $1K+ annually
- Consult a professional: At least once to set up correctly
The Bottom Line
Taxes are a reality of running a profitable reselling business. The good news: legitimate deductions reduce your taxable income, and proper planning prevents surprises.
Track everything, keep records, make estimated payments, and consult professionals when needed. Treat taxes as a cost of doing business, not an afterthought.
The resellers who handle taxes well sleep better at night—and keep more of what they earn.