Etsy, taxes and selling personal vintage collection
February 26, 2016 9:32 AM   Subscribe

A friend and I are starting an Etsy store. We're planning to sell a bunch of vintage clothes I collected in the nineties but do not wear, and then move on to reselling. I am confused about the tax implications and the best process. You Are Not My Tax Lawyer, but....

....So the first large batch of stuff that we'll be selling is my personal stuff that I bought for personal use. Are the proceeds taxable given that I actually bought the things for myself in the first place?

For some of these things, I'll be making more or less what I paid. For several pieces, I anticipate making substantially more than I paid - but since I bought the darn things fifteen or twenty years ago, I have only a dim memory of what I paid in the first place. I'm sure I didn't pay, like, $150 for a dress, but whether I paid $25 or $40 is lost to time.

I'm pretty clear on how to handle the reselling - it may be a pain, but I at least understand what I need to do in terms of tracking what we paid upfront, tracking what we make, etc.
posted by Frowner to Work & Money (12 answers total) 4 users marked this as a favorite
Yes, you need to pay taxes on those items. Technically, any money you receive from selling on etsy/ebay/etc is taxable income.

The IRS rules are clear: you must pay taxes on all personal and business income and that includes money you make selling on Ebay.
You can get away with selling a few things here or there, because it's not worth the IRS's time to track down every 5 dollar beanie baby sale. If you plan to do this right (and you should, if it's going to be a side business), then you should pay your taxes, lest you feel the wrath of an auditor at some later date.
posted by chrisamiller at 9:43 AM on February 26, 2016 [1 favorite]

Response by poster: Not to threadsit, but: How do I handle the "I don't remember the cost of the item in the first place" bit? If I'm running a business, I only pay taxes on the profit, I assume.
posted by Frowner at 9:46 AM on February 26, 2016

You need to figure out what sort of arrangements you will have with your friend before you can figure out the implications for your personal taxes.
posted by yohko at 9:48 AM on February 26, 2016 [2 favorites]

Your assumption isn't right, exactly. The income is taxable. It doesn't matter what you paid for that stuff 20 years ago, the money you make from it now is income. Moving forward as a business you can also have business expenses that can reduce the amount of tax you need to pay on income (i.e. make $1000 and have $200 of expenses and pay tax on $800) which might matter going forward but stuff that you already have and sell is just stuff you have and you owe taxes on the money you make.
posted by jessamyn at 9:48 AM on February 26, 2016 [5 favorites]

The money is not necessarily income, it may be capital gains. See this page from the IRS.
posted by Jahaza at 9:55 AM on February 26, 2016 [1 favorite]

You might also want to read Nolo on capital gains as well because my read of this page is that if you're using it as business property then it doesn't fit the description.
posted by jessamyn at 9:59 AM on February 26, 2016

Yeah all income isn't created equal, and I think the OP is asking about capital gains. You are liable for the capital gains on items you sell at a profit, even if they were initially purchased for your personal use - see "Sales of Appreciated Assets at an Online Auction" on this page. Collectibles and antiques are in their own category for capital gains - 28%, higher than regular income, and higher than regular capital gains. I don't know whether vintage clothes count as antiques.

You should probably talk to an accountant if you want to be very correct, but there are plenty of times when people use estimated cost basis in their capital gains calculations - like if you inherit something or receive it as a gift, you would only pay taxes on the gains *since you received it*, and you would estimate the value at that time.

But on the other hand it might be simpler for tax purposes to imagine you spent nothing on the item and are being taxed on the full value. It might come down to deciding whether you want to pay a few hundred buck to an accountant or to the IRS.
posted by mskyle at 10:00 AM on February 26, 2016

I would make a spreadsheet of your starting inventory, fill in the items you remember and ballpark the ones you don't by doing some research on what it would cost for a comparable item in today's market.

I don't think being able to deduct business expenses would come into play until your profits exceed the threshhold of "hobby" profits, which is why people are saying you should expect to pay taxes on all the proceeds. But it certainly wouldn't hurt to track it all from the get-go.

Also, in an audit situation you would be expected to have invoices, purchase orders and receipts to justify the expenses; I'm not sure how you would get around that. Maybe take the sum from your spreadsheet inventory, and "sell" the lot to you and your partners? I Am Not Your Accountant, etc.
posted by Rube R. Nekker at 10:02 AM on February 26, 2016

It can change too, the stuff you bought for your own use and are now selling may be capital gains.... but then ongoing vintage reselling business may be taxed as a business.
posted by Jahaza at 10:03 AM on February 26, 2016

Oh, I was off about the hobby expenses. Here is the IRS FAQ on that.
posted by Rube R. Nekker at 10:06 AM on February 26, 2016

Response by poster: Thanks, everyone!

It turns out that I have a newly-minted accountant friend - and while I would never ask him to do serious work for free, I think he'd probably give me some informal advice if I buy him dinner.

I think a question in terms of figuring out how to calculate what I owe will be whether clothing bought for personal use counts as a capital asset. In general, I know that capital assets are not things that are expected to be used up (rather than depreciated) - so it seems like things that I bought to wear alongside regular, non-vintage clothing would not be capital assets but just old clothes from a sales perspective. And of course, now I am old enough that that nineties J Crew sweater really is vintage, even though it was new when I bought it.
posted by Frowner at 10:35 AM on February 26, 2016

I am not a lawyer or an accountant, but I have sold clothing online and prepared business taxes as a result.

I did not treat the clothing as capital assets or my profits as capital gains. Instead, I deducted the "cost of goods sold" (along with other expenses) from my revenue to figure out my profit, which I reported as business income (Form 1040 Schedule C). In my case, all of the clothing was purchased recently, so I knew my costs. However, looking at the IRS's How to Figure Cost of Goods Sold, there is a concept of "donation of inventory," which seems like it might be relevant to your case:
If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold.
posted by enn at 11:21 AM on February 26, 2016 [3 favorites]

« Older Sleep apnea surgeon finder?   |   Aargh, accidentally mixed bleach and ammonia in... Newer »
This thread is closed to new comments.