Hello and thank you for coming to our website. We appreciate the opportunity to help you with your questions. Unfortunately, you are obligated to file additional tax forms long before you reach $20k on ebay. Since you are a seller on ebay, you are considered a business owner. That means that you are required to file a Schedule C, "Profit or Loss from Business". In order to fill out the Schedule C form, you need to keep track of the gross income you earn from ebay, any expenses that you have associated with your ebay sales, and any costs for materials you sell. If you keep a stock of things that you resell on ebay, then you have to keep track of your inventory for sale. You keep track of your inventory by valuing the things you have to sell at the beginning of the year, tracking any purchases of items to sell during the year, and valuing the items for sale at the end of the year. Your net profit or loss from your ebay sales will be calculated on Schedule C (gross earnings-inventory cost-expenses=net profit or loss) and then the net profit or loss will be transferred to the business income line on the front of your 1040 tax form. If you earn over $400 of net profit during a year, then you need to fill out a Schedule SE (Self-Employment Taxes). Self-Employment taxes are the business person's equivalent to payroll taxes. If you owe self-employment taxes, you will calculate it on the Schedule SE (which you'll file with your other tax forms), then you will deduct half of the self-employment taxes you owe from your gross income in the income adjustments section at the bottom of the first page of the 1040 form, which will result in your adjusted gross income for the year (along with all of the other entries that you usually make). You will also have to add the entire amount of the taxes calculated on Schedule SE to the Other Taxes section on the back page of Form 1040. If you have a refund coming or qualify for refundable credits, you will be able to subtract any self-employment taxes from that refund. If you don't have any withholding or any refundable credits and you don't owe any income tax, you will still have to pay the self-employment tax.
Another thing to be careful about is that since you are considered self-employed, no one is withholding taxes from the money you receive. If you make a net profit on your ebay sales and you will owe more than $1000 in taxes more than you have withheld on other income, then you may have to pay a penalty to the IRS if you don't make quarterly tax payments during the year. As long as you pay at least as much tax each year as you did the year before through withholding or other means (and that is total tax owed and not related to how much was refunded) or you estimate your taxes within $1000, you should avoid penalties. If you think that you are going to make a substantial profit on your ebay sales, then you should go to www.irs.gov and look at the instructions for form 1040-es, which is the paperwork for the estimated quarterly tax payments. You should also find instructions and forms for Schedule C and Schedule SE, so that you know what records to keep. All of these can be found in the forms and publications section at www.irs.gov.
If you have a net loss on your ebay sales, then you can deduct the loss from your other taxable income. However, you have to convince the IRS that you are running a business and not a hobby in order to deduct your loss from your other income. Money lost pursuing a hobby is only deducted against any hobby income, but money lost running a business is deductible against any other income. You need to make a profit 3 years out of every 5 years, to be safe from the IRS declaring your business to be a hobby. If you can't make a profit that often, then it's up to the judgment of the IRS whether you're operating a business or a hobby. The more businesslike a manner that you operate in, the less likely that they will declare you a hobbyist. A businesslike manner means how you keep records, whether you make changes after a loss year in order to make a profit in the future, and in general whether what you're doing looks like you are seriously trying to make a profit.
The number of items that you sell on ebay isn't relevant to whether you are a business. If you are only making a small amount of money (less than $400 per year) and you are willing to pay taxes on the gross amount, then you can avoid the tax issues and report the income as a hobby under Other Income. You can only do that as long as you don't make more than $400 per year. If you start as a hobby, then begin making more than $400 per year in the future, you will have a more difficult time proving that you are a business in future years when you might have a loss. If you make more than $400 per year, the IRS will still make you pay self-employment taxes.
I hope this answers your questions. Please let me know if you need more information about this issue or if you want more detail about anything I've discussed. Good luck with your business. I hope it succeeds very well for you.