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Online sellers who make big money on eBay could face the tax man

WASHINGTON -- Selling baby and children's clothes, along with some garage sale and thrift store bargains, on eBay helps Sunni Wojnarowsky bring in extra money so she can afford to stay home with her two sons.

The additional dollars are great, but does she really need to hassle with the paperwork and report her small profits to the Internal Revenue Service? Her question, posed to the online auction site's discussion board for sellers, generated much advice -- and more confusion.

''You can't get an answer from anybody," Wojnarowsky said from her home in Brunswick, Ohio. ''It would be nice to have a straightforward answer."

More than 135 million people have registered to use the auction site that calls itself ''the world's online marketplace." Buyers bought more than $34 billion worth of merchandise there last year.

Some people make money by cleaning out items from their closets; others use the site to run small businesses.

In tax law, there is no clear line that separates fun from profit, or a hobby from a business. But IRS instructions make it clear that all income -- a category that includes bribes, gambling winnings, kickbacks, and money made in illegal activities -- can be taxed.

''When you're working on the Internet, it's kind of a gray issue," said Bart Fooden, a certified public accountant in Woodbury, N.Y. ''The big issue is whether you're doing it as a business or not."

The IRS can apply a list of nine indicators that might prove whether someone's online auctions amount to a business. The indicators include evidence that the taxpayer depends on the income, acts in a businesslike manner, or puts enough time or effort into the activity to suggest a profit motive.

Fooden said the seller's intent can indicate whether it's a business or a hobby.

If someone is selling the junk that is collecting dust in a garage or basement, then that person probably is getting less than he paid for it. No profit there.

If someone is buying goods in bulk from a wholesaler and hoping to make a couple of extra dollars reselling each one, then that might qualify as starting a profitable business, Fooden said.

Some categories are not so clear.

If a great-aunt's collection of antique china fetched top dollar from collectors, that might mean capital gains taxes are owed. If someone scours neighborhood garage sales for great deals on comic books to resell on eBay, that might amount to running a business.

It often is best to ask a tax professional, said Bob Miller, noting that he spends about 18 hours a day on eBay, selling collectible postage stamps and advising other buyers and sellers from his home in northern Utah. ''When the person that you owe the money to can throw you in jail, it's always a good idea to get professional advice," he said.

Chris Donlay, a spokesman for eBay, said the company does not report individual sales to the tax authorities.