Etsy Tax Guide – Understanding the Etsy Tax Rules

Not all sellers on Etsy are required to pay income tax on their sales, so it’s vital to grasp HMRC’s guidelines to make sure you report what you need to.

Thanks to HMRC’s self employed trading allowance, many occasional vendors can trade tax-free but, if your earnings surpass this threshold, you’ll typically need to declare your Etsy income on a self-assessment tax return.

Distinguishing between casual selling and running a fully-fledged business is key. Misjudging this distinction might lead to unforeseen income tax liabilities and fines from HMRC.

From January 2025, online platforms will share seller data with HMRC but, this data sharing does not automatically mean you need to complete a tax return.

HMRC primarily focuses on ensuring businesses operating through online platforms pay appropriate taxes and maintain fair competition with traditional retailers.

Our Etsy tax guide will lead you through the fundamental tax regulations including HMRC’s side gig criteria, and assist you on maintaining both profitability and compliance as an etsy seller.

What counts as Casual Selling on Etsy?

HMRC has clear guidelines about selling on etsy and other online platforms like eBay, and understanding these rules helps you stay compliant while maximising your tax-free earnings.

Selling personal belongings or unwanted items occasionally does not typically need to be declared as income for income tax purposes.

This means, when you sell last year’s winter clothes, outgrown baby items, or unwanted gifts, HMRC does not consider this as taxable income.

For valuable items, different rules can apply. If an item is a personal possession that hasn’t been used for business HMRC states “You don’t have to pay Capital Gains Tax on personal possessions with a lifespan of less than 50 years”.

When selling a personal possession (that wasn’t a gift) worth more than £6,000, you might need to pay capital gains tax.

When HMRC considers Etsy Income Taxable

HMRC uses specific criteria to determine if your etsy activities constitute a business. Primarily, buying items specifically for resale or making goods to sell for profit classifies as business activity and therefore taxable.

Several factors indicate business trading:

• Regular and organised selling patterns.
• Purchasing items specifically for resale.
• Making or modifying items for sale.
• Maintaining stock levels.
• Operating with profit-making intention.

Etsy Tax Free Trading Allowance

The trading allowance currently sits at £1,000 and serves as your annual tax-free threshold for self employed income including any online sales on Etsy.

All sources of self employed income are covered by the trading allowance so if you are selling on other platforms like eBay for example this needs to be taken into consideration.

Should your activities classify as business trading, HMRC expects you to register for self assessment when earnings exceed £1,000 in any one tax year.

To maintain tax-free status:

• Monitor your cumulative sales regularly.
• Track both gross income and expenses.
• Consider the impact of fees on your trading allowance.
• Account for returns and refunds in calculations.

The trading allowance is given in addition to your personal allowance (PA) which allows you to earn up to that amount in each tax year tax free.

Essential Records to Keep of Income from Etsy

Maintaining accurate transaction records helps track your progress towards the £1,000 self employed trading allowance.

Accurate book-keeping forms the backbone of tax-compliant etsy selling. Storing your records digitally and in an organised way is vital to help with completing your tax return and if HMRC requires proof of your taxable income and expenses.

To maintain organised digital records:

• Download and store invoices promptly.
• Back up records regularly.
• Keep separate folders for different tax years.

Key documents to save include:

• Sales records and order details.
• Purchase receipts for items bought to resell.
• Shipping costs and packaging expenses.
• Platform fees and other business costs.
• Monthly profit and loss statements.

Simple spreadsheet templates

For sellers starting out, spreadsheets offer a cost-effective way to track transactions. A well-structured spreadsheet should include:

• Transaction details.
• Order numbers.
• Buyer information.
• Item descriptions.
• Sale prices.
• Associated fees.
• Financial summaries.
• Monthly sales totals.
• Fee calculations.
• Profit margins.
• VAT records (if applicable).

As sales volume increases, automated solutions offered by third party accountancy software providers often prove more efficient than manual spreadsheet management.

For sellers registered for VAT, HMRC Making Tax Digital (MTD) requirements necessitate using approved third party software like Xero or QuickBooks.

These platforms typically integrate directly with etsy, automating much of the bookkeeping process which saves a considerable amount of time and effort.

How to Register your Etsy Business with HMRC

If your income from etsy is taxable you must notify HMRC of your circumstances so they can register you as self employed.

For those starting self-employment, complete the CWF1 form which is accessible online on .GOV with a digital and postal version.

The basic details required include your complete name, birth date, current postal address and national insurance number.

Those registering for self-employment must provide additional information, including their business start date and type of work undertaken.

Following your registration, HMRC will forward confirmation documentation including a UTR (Unique Taxpayers Reference); you should reference this number in all future payments and communications with HMRC.