Who taxes Internet income?

Tax Question: Should I claim the money I made on internet, even though I spent more in learning to make money?

• In 2009, I made about $2,000 in extra income from internet-based income. However, I spent about $3,000 in learning resources and tools to help my internet stuff along (so I'm in the hole as far as that goes). I never officially declared a business because my income is so small. Will it benefit me to file as a sole proprietor and claim both expenses and the extra income? Will I end up owing more taxes, or will it actually reduces my taxes? FYI, I make about 36,000/yr in my day job. Thanks for any advice you can give!

• Answer:

  You should definitely file a Schedule C for your sideline business. You may not have registered your business or have gotten ID numbers, licenses, and all of that, but at the end of the day the IRS will consider your online activity a business if your intention was to make a profit. You will be able to claim your income, as well as all of your direct costs related to earning that income, which for 2009 sounds like it will result in a small loss for you. That $1000 loss can be used to offset your income from your day job, actually reducing your taxes by about $150 (you appear to be in the 15% tax bracket) assuming you materially participated in your online business. It sounds like you did all the work, so clearing that hurdle shouldn't be an issue. Good luck with growing your new business in 2010!