• The IRS creates new guidelines for items sold through online auction sites.dollar sign image by Alexander Zhiltsov from Fotolia.com
  
  The popularity of eBay has generated questions about the tax consequences of profits made from sales on the site. Until recently, the IRS had no clear guidelines about reporting profits made from online sites. A new law that will become effective in the 2011 tax year creates firmer rules and will likely impact many consumers that use the online auction site.
  
  

Tax Guidelines for eBay Sales

• All income generated should be reported to the IRS. However, if the transactions conducted through the auction site are similar to a garage sale, like the occasional sale of used items that the owner is selling for less than the amount originally purchased for resulting in a loss of profit then, according to the IRS, the sale "generally" does not need to be reported.
  
  

Hobby vs. Operating a Small Business

• The tax consequences of online sales differ depending on whether selling online is a hobby or is akin to operating as a small business. In an article for "The Fiscal Times", an H&R Block representative states the activity can be defined as a hobby when items are sold "occasionally without intent to make a profit." The sales are more like operating a small business If the sales are "regular activities done to make a profit."
  
  The most important factors for determining whether the activity is a hobby or a business are the intentions of the seller, the number and frequency of the transactions and whether items are routinely being bought and then sold for a profit.
  
  

New Tax Policies for 2011 Reporting Year

• "The Fiscal Times" reported that starting in the 2011 tax year "taxpayers who annually sell more than $20,000 worth of goods and have more than 200 electronic transactions will receive a new IRS form, known as a 1099-K, reporting the profits."
  
  

What You Need to Know

• Starting in the 2011 tax year, selling more than $20,000 in a tax year will result in a 1099-K being issued. If you do not receive a 1099-K because you have sold less than the defined amount to trigger a 1099-K, evaluate whether or not the sales you have conducted online are similar to a garage sale, or whether you are in fact operating a small business. If you have doubts about whether or not to claim the money earned from online sales, talk with a CPA or other tax professional.