Most United States eBay sellers have long known that income generated by eBay sales and PayPal payments is taxable. If you didn't know this, you should. Conventional wisdom has long held (and the federal government believes), however, that many eBay sellers underreport their online income, assuming that it is either non-taxable or largely under the radar.
Enter the 2011 Form 1099-K
Though sellers won't have to change their filing habits in 2010, a new Form 1099-K for 2011 promises to change income reporting by online sellers. The draft Form 1099-K for 2011 implements payments reporting to the IRS for PayPal and credit card merchants, much as already happens with forms W-2 or 1099-MISC for employees and independent contractors.
Starting in 2011, therefore, sellers will be expected to report gross payments via online or credit card payments that coincide with reported 1099-K amounts, then to make adjustments to account for expenses and cash equivalents, fees, chargebacks, refunds, and so on.
What's ReportableGross receipts through electronic payment processors (whether purely online like PayPal or involving credit card numbers) received by users of such payment processors. You may be subject to reporting even if you don't think of yourself as a business, provided you receive payments online via PayPal (or any other similar service or merchant account).
Details and CaveatsAs a practical matter, if you're an eBay seller, this will effect you unless your gross sales are under $20,000 for the year or you receive fewer than 200 transactions. Reporting for small sellers at this level is not required.
Otherwise, if you exceed this volume, you'll be required to provide tax identification information (SSN or EIN number, for example) to payment processors like PayPal and will be expected by the IRS to account in your return for the amounts reported on your 1099-K form(s).