When Does Flipping Become a Business for the IRS?

Three kinds of selling, three places on the return

Personal items have their own guide: reporting a 1099-K for your own used stuff. The rest of this page is about the second and third rows.

What the IRS looks at

The Schedule C instructions give the short test. An activity is a business if your primary purpose is income or profit and you’re involved with continuity and regularity. A sporadic activity or a hobby doesn’t qualify.

For harder cases, the regulations list nine factors in Treas. Reg. §1.183-2(b):

1. The manner in which you carry on the activity: businesslike operation and complete, accurate books and records.
2. Your expertise, or your advisors’.
3. The time and effort you spend on it.
4. An expectation that assets used in the activity will rise in value.
5. Your success in other activities, similar or not.
6. Your history of income or losses from the activity.
7. The amount of any occasional profits.
8. Your financial status, including other income.
9. Elements of personal pleasure or recreation.

The regulation says no one factor decides it, and the answer doesn’t come from counting how many factors point each way. The IRS’s plain-language versions say the same: Tax Tip 2022-57 (which the IRS now labels historical content) and fact sheet FS-2022-38. The fact sheet turns the factors into questions, such as whether you keep complete books, change methods to improve profitability and work to secure suppliers.

The tax code also has a presumption. Under 26 U.S.C. §183(d), if an activity’s gross income exceeds its deductions in at least 3 of 5 consecutive years, it’s presumed to be engaged in for profit unless the IRS shows otherwise.

What changes on the return

As a business, income and expenses go on Schedule C. Platform fees, shipping labels, supplies and business mileage are business expenses, and cost of goods sold comes off the top. Net profit is subject to self-employment tax once your net earnings from self-employment reach $400.

As a hobby, Publication 525 says the income goes on Schedule 1, line 8j. The regulations let you figure that income as gross receipts minus cost of goods sold, if you do it consistently and follow generally accepted accounting methods (Treas. Reg. §1.183-1(e)). Publication 525 says hobby expenses can be taken only as an itemized deduction, can’t exceed the hobby income, and that hobby losses can’t offset other income. Separately, the tax code bars all miscellaneous itemized deductions for tax years after 2017. That rule was set to end after 2025, but P.L. 119-21, sec. 70110 made it permanent. Read together, those rules generally leave hobby expenses with no deduction. The IRS doesn’t say that in a single sentence, so confirm how it applies to you.

Worked example: the same year, both ways

A seller’s 2026: $2,400 of sales; $900 cost of the items sold; $310 of platform fees; $260 of labels; $40 of supplies; 200 sourcing miles in March and 100 in August. Mileage is valued at the IRS rate for each date: 72.5¢ through June 30, 2026, and 76¢ from July 1. The 12% income-tax rate is only an example, and our figures don’t include the qualified business income deduction, which could lower the business column.

On the business side, our set-aside calculator multiplies the $669.00 by 92.35% to get net earnings of $617.82. Social Security at 12.4% is $76.61 and Medicare at 2.9% is $17.92, so self-employment tax is $94.53. Half of it, $47.27, is deductible, so income tax is figured on $621.73. On the hobby side, no self-employment tax applies, but the $831.00 of fees, labels, supplies and mileage generally do nothing.

The totals land close together here. With higher expenses or a loss year, they split apart quickly, because business losses can offset other income and hobby losses can’t. More important, this isn’t a choice you make for the lower number. It’s decided by the facts of how you sell.

The IRS page that says something different

One IRS page doesn’t match the rest. On What to do with Form 1099-K (updated July 27, 2026), the IRS lists “gig worker, freelancer, hobby seller and other self-employed” together. It says they’re considered sole proprietors who report 1099-K payments on Schedule C.

That conflicts with Publication 525, which sends hobby income to Schedule 1, line 8j. It also conflicts with the Schedule C instructions, which say a hobby doesn’t qualify as a business and point nonbusiness income to the same Schedule 1 line. We follow the publication and the form instructions here and flag the conflict. If a 1099-K has made you unsure which applies, that’s a question for a tax professional.

Records that matter either way

Several of the factors come down to records. Whatever your status, these help you show what happened:

• A sales report from each platform, matched to any 1099-K.
• Receipts or card statements for what you paid for each item, including sales tax you paid when sourcing.
• A mileage log with date, destination, purpose and miles (see the mileage guide).
• A simple profit-and-loss summary by month, and notes on changes you made to improve profit, such as dropping a platform or raising prices.

Next step

If your selling looks like a business, put your expected profit into the reseller tax set-aside calculator. It figures self-employment tax exactly and a rough income-tax amount at your own rate. The quarterly taxes guide explains when that money is due.