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If you got it for free – the cost of goods is zero. Quick aside- if you drove 17 miles to pick up the free item, the mileage would be tax-deductible (but still not part of the cost of goods). Since you didn’t pay anything for the item, there is no cost of goods.
I am NOT a CPA, and I have not had the following confirmed by a tax professional, but here is how I handle other items in my inventory.
If it’s something I have owned and maintained for years, it’s valuable (i.e., an old iPhone), and I have not sold it for more than the purchase price, I claim zero profit on the item. For instance, I paid $1,000 for an iPhone and sold it for $300.00. After shipping and eBay fees, the net sale (total amount moving into my bank account) is 270.00. I claim the COG as $270.00.
Again an important aside, this assumes I did not claim the iPhone as a business expense in a previous year. If I had taken a business deduction on the phone, then the cost of goods would be 0 (you can’t take a deduction on something twice).
Another scenario – I make a profit on the item sold, it is from my household, and it is easy to establish the original purchase price.
For example, I bought a book about the movie “A Nightmare on Elm Street” for $50.00. I can prove I paid $50.00 because it is printed on the back of the book, and I have the receipt in my Amazon purchase history. If I sell the book at a profit (more than $50.00), I treat it like any other asset and claim the $50.00 as the cost of goods.
If the item sold from my household is a shirt or pair of paints that I have used for many years, and I don’t have a receipt, I assume the cost of goods to be zero. I figure it’s not worth the trouble.
You can never claim a loss on an asset purchased for your own use. Go back to the Nightmare Elm Street book example. If I paid $50.00, read it, let it sit on a shelf for ten years, I can’t take a loss on the sale if I sell it for ten bucks.
On to the random items in the death pile:
If you know you didn’t pay much for the things remaining in your death-pile, then don’t bother claiming a cost of goods. It’s not worth the effort. If you can look at the pile and reasonably assess how much you paid in total. Then I would arbitrarily distribute the cost amongst the items. You paid $100.00 for the items in the death-pile, and there are 50 individual items for sale. The cost of goods for each item is $2.00. Just be able to provide proof you spent $100.00 at some point. If you are spending cash at yards sales or thrift stores that don’t give receipts, make sure you keep a spending log.
This is how just one guy handles things – curious to hear other approaches.
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Your COGS for items you got for free is inarguably $0.
For items in ancient death piles that you can’t remember anything about, the most conservative answer also would be $0. There could be other answers, which a tax professional could help you with.
If it’s a personal item that you purchased new and have had for years, you might be able to argue that your COGS is equal to the sales price, under the theory that most of the things you buy for personal use depreciate (become less valuable) over time. This would mean that you are selling it for less than you paid for it and don’t have any gain. A loss on the sale of personal property is not deductible, so you don’t care about figuring the amount of your loss…determining there is $0 gain is sufficient.
But there can be instances when you sell a personal item for more than you paid for it. Then you have a personal gain which IS taxable.
Disclaimer: I am a random person on the internet. You should always consult a competent tax professional.
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I recommend watching this short YouTube video by Not Your Dad’s CPA. The video is specifically about calculating COGs on personal items. He posted the video just 2 weeks ago so the info is up to date. He is a reseller and also a CPA. He sells an online accounting/tax course for resellers but you can get plenty of free information from his YouTube videos and from the free Facebook group he has where resellers ask and answer accounting related questions.
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