COGS for Online Sellers (2026): Cost of Goods Sold on eBay, Etsy, and Amazon

Cost of goods sold (COGS) is beginning inventory plus inventory purchases minus ending inventory, and it goes on Schedule C line 4. COGS includes what you paid for the products you sold, inbound shipping, and materials that become part of the product. It never includes eBay, Etsy, or Amazon fees, outbound postage, or ads; those are operating expenses deducted separately.

Key takeaways:

• The formula: beginning inventory + purchases − ending inventory = COGS
• You deduct inventory when it sells, not when you buy it; unsold stock sits on the books as an asset
• ✅ COGS: product cost, raw materials, inbound freight, packaging that ships with the item · ❌ Not COGS: platform fees, outbound postage, ads
• Schedule C Part III (lines 35–42) computes COGS; line 42 carries to line 4
• Sellers averaging under $31 million in gross receipts (2025 returns; $32 million for tax years beginning in 2026) qualify for the §471(c) simplified inventory exception
• A marketplace 1099-K reports gross sales; COGS is the first step from gross to actual profit

Save this cheat sheet — the COGS formula and Schedule C line map in one image.

The COGS Formula: Beginning Inventory + Purchases − Ending Inventory

Cost of goods sold is the direct cost of the items you actually sold during the year. The formula works by subtraction because it is easier to count what is left than to track every individual sale:

The logic: everything you started with plus everything you added, minus what remains, must be what went out the door. Note that inventory is always valued at your cost, never at the listing price; a $40 necklace that cost $12 in materials counts as $12 in every part of this calculation.

Worked Example: An Etsy Jewelry Seller's Full-Year COGS

Ingrid sells handmade jewelry on Etsy. For her 2025 Schedule C (filed in early 2026), her records show:

Her Part III math starts with purchases: $9,750 spent minus the $150 necklace she kept equals $9,600 for line 36. Then:

$3,200 + $9,600 + $1,150 + $480 = $14,430 available during the year, − $4,050 still on the shelf = $10,380 of COGS on line 4.

With $32,000 of gross sales on line 1, her gross profit (line 5) is $21,620. Etsy fees, outbound postage, and ads then come off as operating expenses in Part II, and only the remainder is taxed. This revenue → COGS → gross profit → expenses cascade is exactly the structure of a P&L; our free profit and loss template mirrors it line for line. Ingrid's own hours at the workbench appear nowhere in this calculation, which brings up the first trap below.

What Counts as COGS (and What Does NOT)

For an online seller, the sorting rule is: costs that become part of the product, or get the product to you, are COGS; costs of running the store are operating expenses.

Marketplace fees usually land on Schedule C line 10 (commissions and fees), and outbound postage is typically listed in Part V and totals into line 27b. Our eBay fee calculator and Etsy fee calculator show exactly how much of a sale the platform keeps, which is worth knowing before you price, not after.

Why platform fees and outbound shipping are NOT COGS

Fees and outbound postage are costs of selling, not costs of the goods themselves; they would exist even if you sold a different product. The distinction changes your gross profit (line 5), the number lenders and buyers of businesses read first, and it prevents double counting: a seller who buries Etsy fees in "other costs" on line 39 and also deducts them on line 10 has deducted the same dollars twice, which is exactly the kind of mismatch IRS matching flags.

Buying inventory is NOT a deduction (until it sells)

Spending $5,000 on stock in December does not create a $5,000 deduction in December. Unsold inventory is an asset, and the formula above only releases its cost into COGS in the year each item sells. At Anna Money, where we worked with 60,000+ small businesses, this was the single most common seller misunderstanding we saw: a stock-up year looked like a "loss" in the owner's head but not on the return, because the cash went into inventory, not into deductions.

FIFO vs Average Cost in Plain English

When you buy the same item at different prices during the year, you need a rule for which cost goes into COGS. Two rules cover almost every small seller:

• FIFO (first-in, first-out) assumes the oldest units sell first, so COGS uses your oldest prices and ending inventory holds the newest.
• Average cost blends every purchase into one per-unit average.

A ten-second example: you buy 10 chains at $10 in January and 10 more at $12 in June, then sell 12.

Both methods deduct the same $220 total over time; they only differ in when. Handmade sellers with one-of-a-kind pieces have it easier: each piece has its own known cost (specific identification), so no assumption is needed.

One clarification that confuses sellers every year: Schedule C line 33 does not ask "FIFO or average?" It asks how you value closing inventory, and the first checkbox, "Cost" (line 33a), is what nearly all small sellers use. Pick a costing approach, check 33a, and stay consistent year to year; line 34 asks whether you changed your method, and "Yes" requires an attached explanation.

Schedule C Walkthrough: Line 4 and Part III (Lines 35–42)

COGS lives in two places on Schedule C (2025 revision, the return filed in 2026): the detail in Part III on page 2, and the result on line 4 of Part I. Here is the full line map with Ingrid's numbers:

Two details on this map are printed on the form itself and still get missed. Line 36 subtracts items you took for personal use: Ingrid kept a $150 necklace, so her $9,750 of purchases becomes $9,600. And line 37 says in plain text not to include amounts paid to yourself; a sole proprietor's own labor is never a COGS entry and never a deduction, no matter how many hours the piece took. Line 37 exists for wages paid to production workers, which most solo sellers simply don't have. For the rest of the form, our Schedule C instructions guide walks through every part.

The Small-Seller Inventory Exception: §471(c)

Section 471(c) exempts small businesses from the formal inventory-accounting rules that apply to bigger companies. You qualify if your average annual gross receipts for the prior three years fall under the §448(c) threshold: $31 million for tax years beginning in 2025 (the return most sellers file in 2026, per Rev. Proc. 2024-40) and $32 million for tax years beginning in 2026 (per Rev. Proc. 2025-32). Every eBay, Etsy, and Amazon micro-seller clears that bar by a wide margin.

What the exception buys you: instead of formal inventory accounting, you may treat inventory as non-incidental materials and supplies, or simply follow the method your own books and records actually use. What it does not buy you: deduct-on-purchase. Non-incidental materials and supplies are deducted when used or consumed, and for a reseller that means when the item sells. The practical effect is paperwork relief and flexibility for casual recordkeepers, not a repeal of the inventory concept. If year-end counting is a real burden, this exception plus honest, consistent records is your friend; our inventory tax deduction guide covers the details.

The 1099-K Reports Gross Sales. COGS Gets You to Profit.

A marketplace Form 1099-K is issued only when a seller passes $20,000 AND 200 transactions in a year, and the number it reports is gross: every dollar buyers paid, before fees, refunds, shipping, and long before COGS. Ingrid's 1099-K would show roughly $32,000 while her taxable profit, after $10,380 of COGS and her Part II expenses, is a fraction of that. The gap is not a problem; it is what Schedule C is for. Report the gross on line 1, then let lines 4 and 8–27 tell the real story. Platform-specific walkthroughs: our eBay seller tax guide and Etsy seller taxes guide.

Common COGS Mistakes Online Sellers Make

Deducting inventory in the year it was bought. A December stock-up is an asset purchase, not a deduction. If your COGS is bigger than the cost of what you actually shipped, this is usually why.

Reporting net deposits as gross receipts. Etsy and Amazon deposit your money after fees. Line 1 wants gross sales; the fees you never saw still get deducted, on line 10, not by shrinking revenue. Netting them twice understates income on paper and overstates deductions.

Skipping the year-end count. Line 41 comes from counting what is on the shelf on December 31 at cost. A guessed ending inventory makes this year's COGS wrong and, because line 41 becomes next year's line 35, corrupts next year too.

Putting your own labor on line 37. The form's own text rules it out. Hours are not deductible; only money spent is.

Forgetting personal withdrawals. Items you kept, gifted, or used for product photos and then kept come out of purchases on line 36 at cost.

Profit You Can See All Year: How Jupid Helps

Sellers usually discover their real margin once a year, at tax time. Jupid closes that gap. Connect the bank account where your marketplace deposits land, and Jupid's AI accountant categorizes every transaction with 95.9% accuracy: supply runs, fee-heavy deposits, postage, and refunds each land in the right bucket as they happen. Ask in WhatsApp or iMessage "what did I spend on supplies this quarter?" or "how is my profit tracking against last year?" and get an answer in seconds, backed by your live books instead of a shoebox of receipts. Try Jupid.

Sources

• Schedule C (Form 1040), 2025 revision — Part III, lines 33–42
• Instructions for Schedule C — Part III, Cost of Goods Sold
• IRS Publication 334, Tax Guide for Small Business — chapter on cost of goods sold
• IRC §471(c) — exemption for certain small businesses
• Rev. Proc. 2024-40 — §448(c) gross receipts threshold, $31,000,000 for 2025
• Rev. Proc. 2025-32 — §448(c) gross receipts threshold, $32,000,000 for 2026
• IRS: Understanding Your Form 1099-K

---

This article is for general educational purposes only and does not constitute tax, legal, or accounting advice. Inventory accounting rules depend on your facts, accounting method, and consistency requirements. Consult a qualified tax professional before making decisions for your business.