Taxes for Etsy, eBay, and Shopify Sellers in 2026

Selling on Etsy, Shopify or eBay is great until tax season, when first-time sellers realize they have three different tax problems happening simultaneously. There is federal income tax (self-employment plus regular income tax). There is state sales tax, which has nothing to do with what you owe in income tax. And there is the question of how to account for inventory — money you spent on goods you have not yet sold. This guide covers the practical playbook for handlers of physical product income who do their own taxes.

The 1099-K threshold (and why it keeps moving)

Marketplaces like Etsy, eBay, Amazon, Shopify Payments and PayPal must send you a 1099-K reporting your gross sales when you cross a threshold set by Congress. The threshold has changed repeatedly:

Pre-2022: $20,000 AND 200 transactions (very few sellers triggered).
2023: still $20,000 / 200 (IRS delayed implementation).
2024: $5,000 (no transaction count required).
2025: $2,500.
2026 and beyond: $600 (this is the original ARPA target — verify whether further delay applies before filing).

The threshold determines whether you receive the form, NOT whether the income is taxable. All business income is reportable regardless of whether a 1099-K comes. A seller doing $400 of sales reports the income on Schedule C even with no 1099-K. The forms are a reporting tool, not a definition of what is taxable.

Note: 1099-K reports gross sales (before fees, refunds, shipping). You will deduct fees, refunds and shipping on Schedule C. Do not report only your net deposit — that under-reports gross and creates an apparent mismatch the IRS will flag.

Inventory and Cost of Goods Sold (the biggest seller-specific concept)

For service freelancers, every dollar of expense reduces taxable income in the year paid. For product sellers, the rules are different: money you spent on inventory is NOT deductible until the inventory actually sells. That is the concept of Cost of Goods Sold (COGS).

Schedule C Part III handles the COGS calculation:

Beginning inventory (what you had on Jan 1, valued at cost).
Plus purchases during the year (what you bought to resell).
Plus labor and materials (mostly for makers, not resellers).
Minus ending inventory (what you still have on Dec 31, at cost).
Equals Cost of Goods Sold.

This formula matters because if you bought $20,000 of inventory in November but only sold half by year-end, you cannot deduct the full $20,000. You deduct $10,000 of COGS this year and the other $10,000 (sitting in your closet) is inventory on your balance sheet, deducted next year when those items sell.

Small-business exception: businesses with average gross receipts under approximately $30 million can use the cash method and treat inventory as non-incidental materials and supplies, effectively expensing it when paid. Most solo sellers qualify. Talk to a CPA about whether to elect this; it simplifies the math considerably.

Sales tax (the OTHER tax)

Sales tax is a STATE tax that has nothing to do with what you owe the IRS. You collect it from buyers and remit it to the state. Done correctly, it never touches your income — money in, money out.

Two big rule changes since 2018:

1. Economic nexus. Selling into a state that you have no physical presence in can still create a sales-tax obligation if your sales into that state cross the "economic nexus" threshold (typically $100,000 or 200 transactions). Most states adopted economic nexus after the South Dakota v. Wayfair Supreme Court decision in 2018.

2. Marketplace facilitator laws. States now require platforms like Etsy, eBay, Amazon and Walmart to collect and remit sales tax on behalf of their sellers. If you sell exclusively through marketplaces, the platforms handle most of the sales-tax burden for you.

If you also sell direct (Shopify, your own site, in-person craft fairs), you are responsible for sales tax on those direct sales in states where you have nexus. A seller with both Etsy AND a Shopify store needs to collect sales tax via Shopify in their home state and any state where they cross economic nexus thresholds.

Tools that automate sales tax: TaxJar, Avalara, Quaderno. Worth the $20-50/month once you sell to multiple states direct.

Deductions specific to sellers

Platform fees — Etsy listing fees, transaction fees, payment processing fees. Schedule C line 10 (commissions/fees) or line 27 (other).
Shipping costs you paid — to ship to buyers. Schedule C line 27.
Packaging materials — boxes, tape, mailers, padding, branded packaging. Line 22 (supplies) or 27.
Photography and product images — equipment as Section 179 (line 13), props and backdrops as supplies (line 22).
Marketing — Etsy/eBay promoted listings, Pinterest ads, Instagram ads. Line 8 (advertising).
Inventory storage space — if dedicated, qualifies for the home office deduction even without exclusive use as your "office".
Mileage — to the post office, supply runs, craft fairs, sourcing trips. See the mileage deduction guide.
Subscriptions — Etsy Plus, Shopify monthly fee, Canva Pro, photo editing tools, etc.

A worked example: Sara, an Etsy print seller

Sara sells art prints on Etsy. 2025 numbers:

Etsy 1099-K (gross sales): $48,000
Refunds and returns: $1,200 → Schedule C line 2
COGS:
- Beginning inventory: $800 (paper and ink stock from prior year)
- Purchases (paper, ink, canvas frames): $7,500
- Ending inventory: $1,200
- COGS: $7,100
Etsy fees + payment processing: $4,200
Shipping she paid (when buyer paid for it, the income is in 1099-K and the cost is deductible): $5,800
Packaging materials: $600
Etsy ads: $900
Camera + iPad for product photos (Section 179): $1,400
Home office (200 sq ft simplified): $1,000
Mileage (200 business miles × $0.70): $140

Schedule C line 31 net profit: $48,000 − $1,200 − $7,100 − $4,200 − $5,800 − $600 − $900 − $1,400 − $140 − $1,000 = $25,660.

Through the SE engine that produces ~$3,624 of self-employment tax. Plus federal income tax on the AGI after the half-SE deduction and QBI: roughly $1,200 if Sara is single with no other income. Total federal: ~$4,824 on $48,000 gross sales. Run your own numbers on the SE Tax Calculator.

Common mistakes for sellers

Reporting only the deposit Etsy/Shopify Payments sent to your bank instead of gross sales. The IRS sees the 1099-K gross figure and flags the mismatch.
Including buyer-paid sales tax in your gross income. Sales tax collected from buyers is not your income — pass-through.
Deducting all inventory in the year purchased even when most still sits in your closet on Dec 31. Use the COGS calculation or the small-business cash-method election.
Forgetting that platform fees (Etsy 6.5% transaction + payment processing + listing) are deductible on Schedule C. Free money on the table.
Confusing sales tax obligations with income tax. They are entirely separate; collecting sales tax is not income, and not collecting it does not lower your income tax.
Not registering for sales tax in your home state. Even with marketplace facilitator laws, your state typically requires registration if you sell at all.
Skipping the home office deduction for inventory storage. The exclusive-use rule is relaxed for storage space.

Platform-specific notes

Etsy. Issues a 1099-K when applicable. Etsy collects/remits sales tax in nearly all states for you (marketplace facilitator). You still need a state seller's permit / registration in many states. Etsy fees + processing add to about 11-13% of gross sales — make sure they are deducted.

Shopify. Direct sales mean you are responsible for sales tax in states where you have nexus. Shopify Tax (built into the platform) handles computation and remittance automation in most states for an extra fee. 1099-K comes from Shopify Payments based on payment volume.

eBay. Marketplace facilitator in most states for sales tax. eBay fees roughly 12-15% of gross. eBay sends 1099-K based on Managed Payments volume.

Amazon FBA. Marketplace facilitator for sales tax everywhere. Inventory tax in some states (a few states tax inventory you store in their warehouses). Amazon's reports give you everything you need for COGS.

Selling at craft fairs and pop-ups. Direct sales. You collect sales tax in the state of the event and remit to that state. Most states have temporary-vendor permits.

Sources and methodology

Rules referenced come from IRC § 471 (inventories), Schedule C Part III instructions, and current IRS guidance on 1099-K reporting (Form 1099-K instructions and IRS Newsroom). State sales tax rules vary by jurisdiction — check your state's Department of Revenue. Federal works are public domain (17 U.S.C. § 105).

Disclaimer: Multi-state sellers face complex sales-tax rules. If you cross economic nexus thresholds in 5+ states, talk to a sales-tax specialist or use TaxJar / Avalara to automate.