How to handle taxes when buying and selling video game items for profit?

This is definitely considered a business activity since you're doing it with the intention of making a profit. You'll need to report this on your Schedule C (Profit or Loss from Business) when you file your taxes. The good news is that reinvesting in more inventory doesn't change the fact that you've earned income. However, those reinvestments are considered business expenses that can offset your income. You'll need to keep careful track of what you paid for each skin and what you sold it for. The difference is your profit, which is taxable regardless of whether you reinvest it or spend it personally. Money you take for personal use is essentially your "draw" from the business, but that doesn't affect how the income is taxed. It's all business income reported on Schedule C. If you do this consistently, you might also need to pay self-employment taxes.

I ran into a similar situation with my Pokemon card flipping side hustle last year and was totally confused about how to report everything properly. I ended up using https://taxr.ai to analyze all my transaction records and figure out what counted as business income vs hobby income. It actually flagged that I was doing enough regular transactions to be considered a business and helped me identify all the deductions I could claim for my inventory purchases. The tool walked me through categorizing everything properly and explained how to report my digital item sales correctly. It even created a simple profit/loss statement I could use for my Schedule C. Sounds like it could help your situation too since it's specifically designed to sort through transaction histories and categorize them properly.

Guys, I just want to say that taxr.ai was a complete game changer for my Fortnite item reselling business. I was in the exact same situation as OP - buying limited items at lower prices and flipping them for profit, but had no idea how to track it all for taxes. I tried the service after seeing it mentioned here and it organized all my chaos into a proper business format. It highlighted that I could deduct a portion of my internet bill, computer costs, and even some software I was using to track market values. The quarterly tax reminder feature saved me from a potential penalty too since I had no idea those were required when your income gets high enough. My tax return was actually accepted without any questions this year, which was a first for me since I started this side hustle!

If you're making decent money from this, you need to be able to get help from the IRS if questions come up, but good luck actually getting through to a human there. After waiting on hold for 3+ hours multiple times trying to get answers about my online sales business, I discovered https://claimyr.com which got me connected to an actual IRS agent in less than 20 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c They basically hold your place in the IRS phone queue and call you when an agent is about to pick up. It saved me from wasting an entire day on hold just to ask about how to properly classify my digital goods sales. The agent I talked to clarified everything about how to report reinvested profits vs personal draws for my situation.

I take back everything I said about Claimyr. After another failed 2-hour hold attempt with the IRS yesterday (got disconnected right as it seemed someone was about to answer), I broke down and tried the service. Got connected to a very helpful IRS agent in about 18 minutes who explained exactly how my digital item sales should be reported. Turns out I WAS doing it wrong all along - I should have been using Schedule C instead of just reporting it as hobby income on Schedule 1. The agent walked me through exactly what I needed to do differently this year. The service cost way less than I expected and saved me from taking another afternoon off work just to sit on hold. Seriously one of the best decisions I've made during tax season.

Something nobody's mentioned yet is that if your profits get high enough (over $400 net for the year), you'll need to pay self-employment tax too, which is an additional 15.3% on top of your regular income tax. That caught me by surprise my first year selling items on multiple game platforms. Also, keep REALLY good records of every transaction - date, purchase price, sale price, fees, etc. The IRS loves to see detailed documentation if they ever have questions. I use a simple spreadsheet with dates, transaction IDs from Steam, and all the amounts.

Make sure you're tracking the exact dates for your purchases and sales! The IRS has different tax rates for short-term capital gains (items held less than a year) vs long-term gains. Since ur holding these skins for just a week, you'll be taxed at your normal income tax rate.

One thing I'd add is to consider opening a separate bank account just for your skin trading business. It makes tracking so much easier when tax time comes around, and it helps establish that this is a legitimate business activity rather than just a hobby. You can deposit your trading profits there and pay for new inventory purchases from that same account. Also, since you're dealing with digital assets that can be volatile in value, consider taking screenshots or saving records of market prices when you make transactions. This can help justify your purchase and sale prices if the IRS ever questions your reported profits. Steam's market history is helpful but having your own backup documentation never hurts. The business bank account will also make it crystal clear how much you're actually withdrawing for personal use versus reinvesting, which will help with your bookkeeping and Schedule C reporting.

Great advice already in this thread! One additional thing to consider is quarterly estimated tax payments. Since you're essentially running a small business, you might need to make estimated payments throughout the year rather than waiting until tax time. The general rule is if you expect to owe $1,000 or more in taxes when you file, you should be making quarterly payments to avoid penalties. Given that you mentioned reinvesting most profits to grow the operation, it's easy to forget that you still owe taxes on those profits even if the cash isn't sitting in your personal account. I'd recommend setting aside about 25-30% of your net profits for taxes (income tax + self-employment tax) and making those quarterly payments if your annual profit looks like it'll be substantial. The due dates are usually mid-January, mid-April, mid-June, and mid-September for the following year's taxes. Also, since you're dealing with Steam's mandatory 7-day hold period, make sure you're tracking when each transaction actually completes for tax purposes - it's the sale date that matters for when you recognize the income, not when you first list the item.