Running an Etsy shop is a real business in the eyes of the IRS the moment you sell with the intent to make a profit — which means real business deductions are on the table too. Many handmade sellers under-claim simply because they do not realize how much of their craft spending qualifies. Here is what you can legitimately deduct.
Materials and supplies
The cost of raw materials that go into what you sell — fabric, beads, wood, clay, packaging inserts, printer ink for custom prints, and similar consumables — is fully deductible as a cost of doing business. Keep receipts organized by category; even a simple spreadsheet or shoebox system works as long as it is consistent and complete. Our recordkeeping guide covers exactly what the IRS expects a receipt to show.
Platform and payment processing fees
Every fee Etsy deducts from your payout — listing fees, transaction fees, payment processing fees, and any offsite advertising fees you were charged — is a deductible business expense. So are any advertising dollars you spend promoting listings, whether through Etsy Ads or external platforms like Instagram or Pinterest promotions.
Shipping and packaging
- Shipping labels and postage, whether purchased through Etsy or a separate carrier account.
- Boxes, mailers, bubble wrap, tissue paper, and branded packaging inserts.
- Shipping scale, label printer, and related equipment (often deductible immediately — see our guide on Section 179 vs. bonus depreciation for equipment purchases).
Home studio or workspace
If you have a dedicated space used regularly and exclusively for making or storing inventory, packing orders, or managing the shop, you likely qualify for the home office deduction. This applies even if it is a corner of a garage used only for crafting — the space just needs to be used exclusively for the business. Full rules, including the simplified vs. regular method, are in our home office deduction guide.
Tools, equipment, and software
| Expense | Deductible? |
|---|---|
| Sewing machine, kiln, laser cutter, or similar production equipment | Yes, often immediately expensable |
| Photo editing or listing software subscriptions | Yes |
| Camera or lighting equipment used for product photos | Yes, business-use percentage |
| Craft fair booth fees and travel to sell at markets | Yes |
| Personal-use portion of any shared tool | No — deduct business-use % only |
Inventory and cost of goods sold
If you keep an inventory of finished or partially finished products, the materials tied up in that unsold inventory are generally not deducted until the item sells — they become part of your cost of goods sold. This trips up a lot of new sellers who deduct all their material purchases upfront regardless of what has actually sold. A simple bookkeeping system or accountant can help you track this correctly, especially as the shop scales.
Don't forget self-employment tax and quarterly payments
Once your Etsy shop turns a consistent profit, you are responsible for self-employment tax on top of income tax, and the IRS expects estimated payments throughout the year rather than one lump sum in April. See our guides on self-employment tax and quarterly estimated taxes to avoid an underpayment penalty.
Frequently asked questions
Do I owe taxes on Etsy sales if I only sell as a hobby?
Hobby income is still taxable, but hobby expenses generally cannot be deducted the way business expenses can. If you sell regularly with the intent to profit, you likely qualify as a business, which unlocks the deductions in this guide — consult a tax professional if you are unsure which category applies to you.
What if I use craft supplies for both personal projects and my shop?
Only the portion used for the business is deductible. Keep supplies and receipts separated where possible, or maintain a log estimating the business-use percentage.
Does Etsy report my sales to the IRS?
Etsy, like other payment platforms, issues Form 1099-K once your sales cross the applicable reporting threshold for the year. Even below that threshold, you are still required to report all business income.