Etsy Seller Tax Deductions (2026)

Last updated July 2026.

Etsy sellers write off the ordinary costs of running a shop: materials and inventory through cost of goods sold, every Etsy fee including listing, transaction, payment processing, and Offsite Ads, shipping supplies and postage, packaging and branding, the business share of a home studio, equipment and tools, software and subscriptions, photography props, craft show fees, and mileage to the post office and supply runs. The split that matters most is between cost of goods sold and operating expenses, because Etsy sellers who put everything in one bucket usually report the wrong gross profit.

The reporting rule also moved. After the One Big Beautiful Bill Act, the Form 1099-K threshold reverted to more than $20,000 in gross sales and more than 200 transactions, both conditions, for the 2025 tax year and beyond. Most part-time Etsy sellers will not get a 1099-K at all. That does not make the income untaxed.

Do I have to report Etsy income if I do not get a 1099-K?

Yes. All business income is reportable whether or not a form arrives. The 1099-K is an information return that tells the IRS what a platform paid you; it is not what creates the tax. With the threshold back at $20,000 and 200 sales, a seller doing $9,000 a year receives nothing in the mail and still owes tax on the profit.

Report on Schedule C if you are running a business, which is the case if you sell with continuity and an intent to make a profit. The practical benefit of filing as a business is that expenses are fully deductible against the income. Hobby sellers report the income but cannot deduct hobby expenses at all under current law, which is a far worse outcome than most people expect.

What can Etsy sellers write off on taxes?

Two categories, and keeping them apart is the whole game.

Cost of goods sold (Schedule C Part III) covers what physically goes into the product: raw materials, fabric, yarn, beads, wood, clay, blanks, resin, findings, and any finished inventory you buy to resell. Also direct labor if you pay someone to make the items. COGS reduces gross profit before operating expenses apply, and it is tracked against inventory, so materials you bought but have not used yet are generally not deducted until the goods are sold.

Operating expenses (Schedule C Part II) cover running the shop:

• Etsy fees. Listing fees, transaction fees, payment processing fees, Offsite Ads fees, Etsy Ads spend, and subscription plan fees are all deductible. Pull them from your Etsy payment account statements rather than estimating.
• Shipping. Postage, shipping labels, boxes, mailers, tape, tissue, bubble wrap, and printer ink. Shipping supplies are usually an operating expense rather than COGS.
• Packaging and branding. Stickers, thank you cards, custom tissue, logo design, and business cards.
• Home studio. The business-use portion of rent or mortgage interest, utilities, and internet for a space used regularly and exclusively for the shop, via Form 8829 or the simplified method.
• Equipment and tools. Sewing machines, kilns, cutting machines, printers, cameras, laptops, and craft tools, often deductible in full under Section 179 rather than depreciated over years.
• Software and subscriptions. Design software, bookkeeping tools, listing and SEO tools, and cloud storage.
• Photography. Props, backdrops, lighting, and product photography services.
• Mileage. Trips to the post office, supply runs, and craft fairs, at the 2026 standard rate of 72.5 cents a mile.
• Craft shows and markets. Booth fees, table rentals, tent and display gear, and travel to the event.
• Education. Courses and workshops that improve skills in the business you already run.
• Professional fees. Bookkeeper, accountant, and business legal costs.

Are Etsy fees tax deductible?

Yes, entirely. Etsy fees are ordinary and necessary costs of selling on the platform, and every category of them is deductible: the per-listing fee, the transaction fee on each sale, payment processing, Offsite Ads commissions, advertising spend, and any subscription plan. This is one of the most commonly underclaimed deductions for Etsy sellers, because the fees are netted out of payouts and never feel like money you spent.

That netting is exactly the trap. Your gross sales are higher than what hit your bank account, and both numbers have to appear on the return: gross revenue as income, fees as an expense. If you record only the deposit, you have quietly understated revenue and skipped the fee deduction, which usually leaves you worse off and out of step with what the platform reported. Download the annual Etsy payment account statement and use the real figures.

Can I deduct materials I bought but have not sold yet?

Generally not in the year you buy them. Materials and inventory flow through cost of goods sold, which means you deduct them as the goods are sold, not as they are purchased. A December supply spree does not create a December deduction if the finished items sell the following spring.

There is meaningful relief for small sellers: businesses under the gross receipts threshold for the small business taxpayer exemption may be able to treat inventory as non-incidental materials and supplies, which simplifies the timing considerably. The rules here reward a conversation with a CPA rather than a rule of thumb, because the right answer depends on your revenue and your accounting method. What is universal is that you need the receipts either way, with dates and amounts, because you cannot compute COGS from memory.

What business code should an Etsy seller use?

Choose the code that matches what you actually do. Sellers who make what they sell generally use the code for the product category, such as jewelry, apparel, or other miscellaneous manufacturing. Sellers who primarily buy and resell online typically use 454110 for electronic shopping and mail-order houses. Vintage resellers and print-on-demand shops usually fall on the retail side.

The code is statistical and does not change what you may deduct, so consistency and honesty beat cleverness. What does matter is that retail and manufacturing are not specified service trades or businesses, so the 20 percent qualified business income deduction is available to Etsy sellers without the income phase-out that applies to consultants and similar SSTB filers.

Do I need to collect sales tax on Etsy?

For most US sales, Etsy handles it. Marketplace facilitator laws in every state with a sales tax require the platform to calculate, collect, and remit sales tax on your behalf for orders shipped to those states. You do not remit that money yourself and you do not deduct it as an expense, because it never was your revenue.

Sales you make outside the platform are a different matter. If you sell at a craft fair, through your own website, or directly to a local customer, marketplace collection does not apply and your own state registration and filing obligations do. Keep those channels recorded separately from the start, because untangling them later is genuinely painful.

How do Etsy sellers keep track of expenses?

Open a separate business checking account and card on day one. It is the single change that makes everything downstream easier, because a supply run that mixes craft materials with groceries is a problem you have to solve line by line later.

Then handle the two data sources differently. Etsy fees and sales come from the platform as a statement you download once a year or once a quarter. Everything else, the craft store receipts, the shipping supply orders, the booth fee, the printer ink, arrives as paper and email and has to be captured deliberately. Photograph paper receipts at the register and route emailed ones into one folder, then batch them into a categorized spreadsheet monthly.

The itemization matters more for makers than for most businesses, because a single craft store trip often contains both COGS materials and Part II supplies. A total alone cannot make that split; line items can. Our tax deduction tracker extracts every field from those receipts into a running write off log, and the Schedule C expense tracker maps the results to the Part II lines and the Part III COGS section separately.

Once your shop is large enough to need financing, a valuation, or a partner, the same clean records let you turn a bookkeeping export into a proper profit and loss statement instead of reconstructing one from screenshots.

How long should Etsy sellers keep receipts?

At least three years from the date you file, which covers the ordinary audit window. Extend that to six years if you ever understate income substantially, and keep records for equipment such as a kiln, camera, or cutting machine for as long as you own the asset plus the normal period afterward, because the purchase price sets the depreciation basis you claim.

The IRS accepts digital copies as long as they are complete, accurate, and legible, so scanning is both compliant and more durable than a box. Craft store receipts print on thermal paper that fades within months, which means the receipt for your most expensive material purchase can be blank by the time it matters. Capture early. See how long to keep business receipts for the full retention picture.

The short version

Report the income even without a 1099-K, since the threshold is back at $20,000 and 200 sales and most sellers will fall below it. Record gross sales and deduct Etsy fees rather than banking the net. Keep materials in cost of goods sold and shop costs in operating expenses, because that split determines your real margin. And capture the receipts as they happen, because the deduction you cannot document is the one you end up paying full tax on. Sellers on other channels can compare notes in our guide to tax deductions for online sellers.