Most Etsy sellers overpay their taxes for one simple reason: they let the big gross sales number stand in for profit and forget how much of running a shop is deductible. You're taxed on profit, and nearly every cost of making and selling your work counts against it. Here's the honest 2026 rundown of what an Etsy seller can legitimately write off — US-focused, with a note for other countries at the end.
This is general information, not tax advice — rules vary by country and situation, so confirm your specifics with a local tax professional.
First, the rule that unlocks all of this: business, not hobby
You can only deduct these expenses if the tax authority treats your shop as a business — an activity you run to make a profit — rather than a hobby. This matters more than it used to: since the 2018 US tax overhaul, hobby expenses aren't deductible at all, even though hobby income still is. That's the worst of both worlds. Selling regularly, keeping records, and genuinely trying to turn a profit are what make you a business. Clean records are the price of admission for every write-off below.
Every Etsy fee is deductible — and there are more than you think
All the fees Etsy takes are ordinary business expenses, and for US sellers they go on Schedule C. That includes the ones people forget:
- The $0.20 listing fee (and every renewal)
- The 6.5% transaction fee
- Payment processing fees
- Offsite Ads and Etsy Ads spend
- The regulatory operating fee and currency conversion (2.5%)
- For UK/EU/Türkiye sellers, even the VAT charged on top of those fees is a cost of doing business
The catch is that Etsy doesn't hand you a tidy annual total by fee type — it's buried in your Payment account, listed by date. Add it up wrong and you under-claim your single biggest recurring deduction.
Materials and supplies
Everything that physically goes into the product — fabric, clay, resin, beads, clasps, blanks — is your cost of goods sold. Consumables you use in your workspace but that don't end up in the product — printer ink for labels, sandpaper, glue, cleaning supplies — are usually deducted separately as supplies. Both reduce your taxable profit; they're just recorded in different places.
Shipping and packaging
The postage you actually paid for — the shipping labels you bought — is deductible, along with mailers, boxes, tissue, tape and thank-you cards. Remember the flip side: the shipping a buyer paid you is income, while the label you bought is the deduction. If you offer free shipping, you're absorbing the whole label cost, so this line gets bigger, not smaller.
The deductions sellers leave on the table
- Home office. If part of your home is used regularly and exclusively for the shop, the simplified method lets you deduct $5 per square foot, up to 300 sq ft — a $1,500 maximum for 2026. No receipts required, just an honest measurement.
- Mileage. Trips to the post office, the craft store and supply runs count. The IRS business standard mileage rate for 2026 is 72.5 cents per mile (up from 70 cents in 2025). Keep a simple log.
- Software and subscriptions. Design tools, a profit tracker, Etsy Plus, your website — the business share is deductible.
- Equipment. A camera, printer, sewing machine or laptop used for the shop; under current rules most equipment can be fully deducted in the year you buy it.
- Professional and utility costs. Your accountant's fee, and the business-use portion of your phone and internet.
Two US tax breaks worth knowing
First, half of your self-employment tax is deductible. If your net profit is $400 or more, you owe about 15.3% self-employment tax on it — but you get to deduct half of that against your income tax. Second, the Qualified Business Income (QBI) deduction lets Schedule C sole proprietors deduct up to 20% of qualified business income; it was made permanent under the 2025 tax law. Note that QBI lowers your income tax, not your self-employment tax.
Outside the US
The principle is the same even if the forms differ: ordinary, necessary business costs reduce your taxable profit, usually via a self-assessment or annual return. Keep VAT as a separate question from income tax. A local accountant almost always saves more than they charge.
The catch: you can only deduct what you can prove
Every write-off here needs a real number behind it. Your Etsy fees are the largest recurring deduction and the hardest to total accurately — dozens of small charges, spread across the year, in several fee types, with VAT-on-fees stacked on for non-US sellers. Estimate from "6.5%" and you undercount; guess and you risk trouble if you're ever questioned. You can sanity-check a single sale's fees with our free Etsy fee calculator, but that's one order.
For the whole year, that's the gap Seller Profit Lens closes. It connects to your shop read-only, reads the fees Etsy actually charged to the cent, subtracts the costs you enter, and reconciles so your numbers match Etsy's — leaving you a clean fee-and-cost total to hand your accountant instead of a guess. It pairs naturally with our guide on whether you owe tax on Etsy income. It's in free beta now. Join the waitlist →