How Reselling Could Affect Your Tax Situation

Increasingly, we live in a side-hustle world, where many people look to either supplement or replace more traditional income with a variety of part-time or freelance jobs. There are various pros and cons to focusing more on side hustles; whether it’s right for you depends on your situation. Still, it can make a lot of sense to understand some of the different side hustles out there so that you can see if there are any that make sense for you to explore. One popular side hustle is reselling.

What is reselling?

Reselling is a general term for a variety of different side hustles, including retail arbitrage (RA), online arbitrage (OA), or dropshipping. At its most basic, reselling is finding a popular product for a lower price and then selling it for a higher price. The basic concept of reselling (buying something for a low price and then selling it to someone else) has been happening throughout society for hundreds if not thousands of years. However, now the Internet has helped make it easier. Buying groups and affordable shipping make it easier for everyone to find good deals, and e-commerce sites like eBay, Amazon and Craigslist provide easier access to potential consumers. This combination has helped reselling to become more profitable and more popular.

How does reselling work? (retail arbitrage, online arbitrage, dropshipping, etc.)

There are a variety of different ways that reselling can work. Here is a brief look at three different ways to resell:

Retail Arbitrage

Retail Arbitrage (RA) is finding products at a low price in-person. This is often at retail stores (hence the name) but might also include finding deals at garage sales or online markets like Craigslist. With retail arbitrage, you might be able to find loss leaders or other sales at large retailers. Then, you can buy the product on sale, hoping to resell it for a profit when the sale is over. It’s important to note that most large retailers are aware of this concept — so they may limit how many items you can buy or even ban your account if you purchase too frequently.

Online Arbitrage

While retail arbitrage has a lot of benefits since you might have less competition in your local market, you are somewhat limited in scale since it requires you to be physically present. Online arbitrage provides more potential places you can find items, but also opens you up to more competition.

I have personally done online arbitrage, and the trick is finding products at a discount relative to their regular price. There are many possible opportunities, but what I did was look for popular items on sale at Amazon. I then bought the items and, once the sale was over, sent them back to one of Amazon’s “Fulfilled By Amazon” warehouses. In most cases, the items sold relatively quickly for a small profit, though in some cases I had to reduce my price to move the inventory. While I made a small profit overall, I decided that for me, the profit earned was not worth the time spent, so I eventually moved on to other side hustles.

Dropshipping

Dropshipping is similar to online arbitrage in that you are finding a product online and then reselling it. But whereas with online arbitrage you purchase an item and then resell it, with dropshipping you take yourself out of the middle. You may advertise a particular item, but you only actually purchase the item from the manufacturer if someone buys it “from you.” This eliminates the need to have an actual inventory of items for sale.

Where to resell items?

Finding a good deal on something doesn’t matter much if you can’t resell it for a higher price. There are a few places that you might resell items that you’ve purchased for a low price:

• Amazon is probably the most popular place — they have a “Fulfilled By Amazon” program that allows you to ship items to Amazon’s warehouses and allow them to fulfill your sale, for a fee
• Auction sites like eBay
• Marketplaces like Craigslist or Facebook Marketplace
• Some resellers have a physical storefront or sell at flea markets or garage sales

Why would you consider reselling?

Many people get into reselling because they realize that this type of behavior (buy low, sell high) is something they’ve actually been doing their whole life. There’s an undeniable feeling about the thrill of “a deal” that is meaningful to many people. Others have pivoted into reselling as a way to rack up credit card points. But at the end of the day, reselling is a business, and you’re unlikely to be successful unless you can consistently find good deals and run your reselling venture as an actual business.

Tax implications of reselling

There are a couple of tax implications of reselling that you’ll want to be aware of if you’re considering reselling. Firstly, any net profit that you make (gross profit minus any expenses) is subject to federal, state, and local income tax. Even if you don’t get a 1099 or other tax document from your marketplace (Amazon, PayPal, eBay, etc.), you are still required to report all your income and pay income tax on the portion that is taxable.

It’s also worth mentioning that depending on your situation, you may be able to purchase some items without paying sales tax. Sales tax is generally charged by retailers to an end consumer. So if you are a reseller (which usually requires being registered with the state and/or the retailer in question) and can demonstrate that you’re not buying the item in question for your own use, you may be able to purchase it without paying sales tax.

Conclusion

Reselling is a side hustle that has been around for hundreds of years but one that has recently become more popular. At its most basic, reselling is the skill of finding a product at a low price and then reselling it for a higher price to a different customer. There are a few different ways that you can resell products, including retail arbitrage, online arbitrage or dropshipping, but no matter how you choose to resell, make sure that you’re aware of the tax implications and report any net income or profit that you earn.

Don’t worry about knowing these tax rules. Meet with a TurboTax Full Service expert who can prepare, sign and file your taxes, so you can be 100% confident your taxes are done right. Start TurboTax Live Full Service today, in English or Spanish, and get your taxes done and off your mind.