How much can I sell online without paying taxes?
Whether you sell items exclusively online or not, the IRS and most states consider any income you earn from these sales taxable. Whether or not you will owe taxes for selling personal items, goods, or services online will depend on several factors, including whether you made a profit.
Usually, you need to pay federal income taxes and self-employment taxes if you make more than $400 during the tax year. If your online sales income flowed through a third-party transaction network like PayPal or Venmo, and that income exceeded $20,000 for the year and the number of transactions exceeded 200, you can expect to receive a 1099-K form. The transaction network typically sends the form the following January, making it easier to identify and report your income. At some point in the future, the 1099-K minimum amount will be lowered to $600, down from $20,000 in prior years.
Do I need to collect sales tax for selling online?
It depends on where your customer is located. Online sales tax is calculated based on a customer's shipping location rather than their billing address. Only five states do not have any sales tax requirements:
- Alaska.
- Delaware.
- Montana.
- New Hampshire.
- Oregon.
Most states that require sales tax for in-person sales also require sellers to collect sales tax for online sales. Missouri is the latest state to pass a law requiring sellers to collect sales tax for online transactions, and this law went into effect in 2023.
However, there are a couple of cases when online sales tax is not collected. Some states have nexus laws that protect online sellers without a place of business in their state. Other states have set limits that online sellers must exceed before having to pay sales taxes. Also, whether a state requires sales tax for online sales or not, sellers may be required to follow county or city sales tax requirements.
In the end, although this is a complex area, you are responsible for understanding your tax obligations. Getting tax legal help from a lawyer can help you understand which rules apply to your business so you can collect sales taxes appropriately.
How do I charge sales tax on online sales?
If you are required to charge sales tax in one or more states based on your online sales activity, you may need to register for a sales tax permit in each state. You can do this by contacting the state's Department of Revenue or state taxing authority. Requirements may vary from state to state, but generally require out-of-state businesses to make a significant amount of sales in the state. In California, for example, registration is required for out-of-state businesses that make over $500,000 in sales in the previous calendar year.
You may also need to know how the state taxes the types of products and services you offer because different rates and exemptions may apply to different items. For example, states like Massachusetts and Connecticut offer limited sales tax exemptions on clothing.
For businesses that must charge sales tax for online sales, the good news is that most online seller platforms provide the framework for sellers to set rates and collect sales taxes. Depending on the state tax authority, your sales taxes could be due every month, every three months, twice a year, or once a year. It is important to file any required paperwork and make payments by the deadlines. This is key even if you did not make any sales in that state or local area during the tax period — this is known as filing a zero return.
Do I have to report profit after selling an asset that has gone up in value?
Profit on business products and services is taxed as ordinary income. However, when you sell a personal item for more than you paid or sell a business asset that has gained value, you will likely need to report the profit as capital gains. You may owe taxes based on the capital gains tax rates for that period.
The amount you owe usually depends on:
- How long you held the asset.
- The type of asset.
- Its original value or purchase price.
- Whether you are getting the payment all at once or over time.
- Your taxable income.
Selling something you held for less than a year generally means the profit is taxed as ordinary income rather than as a capital gain. However, collectibles such as artwork, antique furniture, vintage toys, comic books, and vinyl records are generally taxed as capital gains regardless of how long you owned them.
When selling any item online, it is wise to keep detailed records, including the dates you bought and sold the item, the price you paid, and the sales price. You may also want to record the costs, commissions, and other fees paid. This information may be invaluable when it comes time to calculate and pay taxes, may yield significant tax savings, and is helpful in the event of a tax audit.
Do I have to report losses on business assets that have lost value?
Businesses are generally required to report and pay taxes when selling something for a profit. But what happens when you sell a business asset at a loss rather than a gain? In this case, you may be required to report losses on business assets that have lost value. Different rules apply to each type of business asset, and there are different ways they may lose value.
Typically, a business asset is referred to as a Section 1231 asset. If you sell a business asset at a loss, you may be able to use that loss to offset ordinary income earned during the tax year. You would report such sales using IRS Form 4797 (Sales of Business Property).
Assets that may offset your income, such as Section 1231 assets, include real estate or personal property used in the business that can lose value. This may include the following and more:
- Vehicles.
- Computers.
- Machinery.
- Livestock.
- Unharvested crops.
Small business taxes can be complex and have many moving parts. For some businesses, it may be a good idea to register a separate business entity for tax purposes. However, taxes are just one factor to consider when deciding how to structure your company.
If you have legal questions relating to your business, reach out to a Rocket Legal Pro for affordable legal advice. Want to leave figuring out complicated tax credits and deductions to the pros? Get matched with a Tax Pro to save time and money filing your tax returns.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
