Inventory or Supplies: How to Decide?

Publication date: February 7, 2024

Reading time:  6 minutes

Tax time can be a daunting period for Etsy sellers, especially when it comes to categorizing expenses correctly. A common area of confusion is distinguishing between inventory and supplies. Accurately categorizing items is essential, as it impacts your taxable income and deductions.

NOTE: This article is specific for Etsy sellers in the United States (US), who file their annual taxes with the Internal Revenue Service (IRS). However, the same general principles usually apply to other taxing agents also. eRank is not a legal or tax official, and this article is meant for informational purposes only. It is always best to check with your legal or tax representative for specific questions and advice.

Inventory: What It Is

Inventory refers to the goods you purchase or create to sell on Etsy. These are the products you showcase in your shop and ultimately ship to customers. Inventory includes items that you have crafted, vintage items you are reselling, or any products you have sourced for resale, as well as the individual parts that make up the item that you are selling.

The IRS considers inventory to be a capital asset. This means it is an essential part of your business and affects your profit calculations. You need to track changes in your inventory’s value over time to determine your Cost of Goods Sold (COGS). Accurate COGS calculations are vital for your tax return because they help determine your gross profit and taxable income.

Supplies: What They Are

Supplies, on the other hand, are items that you use to create, package, or ship your products but may not be part of the final product you sell. They can be tangible goods such as packaging materials, shipping labels, or printer ink.

Supplies are categorized as ordinary and necessary business expenses. They are considered deductible expenses that reduce your annual taxable income. The key is distinguishing them from inventory, which is a capital asset. By properly categorizing expenses as supplies, you can benefit from valuable deductions that reduce your tax liability.

Differentiating Between the Two

Now that you know what inventory and supplies are, it is time to explore how to differentiate between the two. Here are some items to consider when making your decision.


Inventory (in general) becomes part of your finished products, while supplies are consumed in the production or shipping process. If it is used in creating your Etsy listings or packaging your products for shipping, it is likely a supply.


Inventory has a long-term presence in your shop until it’s sold. Supplies are typically used up or replaced more frequently. For instance, if you purchase bulk packaging materials that last for several months, they are supplies. If you purchase bulk beads for crafting jewelry that you’ll sell over time, however, it is inventory. 

Direct impact

Ask yourself whether the item directly impacts the quality or functionality of your final product. If it does, it is likely an inventory item. If it is essential to your business but not part of the product customers receive, it is probably a supply.

Frequency of purchase

Consider how often you need to replenish the item. Frequent purchases often indicate supplies. Infrequent or one-time purchases are more likely inventory.


If you need to replenish an item because it is depleted while creating your products, it is a supply. If you are restocking to maintain your shop’s inventory to create your items, it is part of your inventory. 

Practical Examples

Here are a few practical examples to help clarify the distinction. 

  • Beads for Jewelry Making: Beads purchased to create jewelry for sale on Etsy are inventory.
  • Wood Boxes to Hold the Jewelry: The wood boxes are part of the overall final product sold and are inventory.
  • Packaging Materials: Boxes, bubble wrap, and tape used to ship your products are supplies.
  • Printer Ink: Printer ink used for printing shipping labels or packing slips is a supply.
  • Glue: Glue purchased for your hot glue gun is a supply.

Inventory or Supply?

Properly distinguishing between inventory and supplies is important for Etsy sellers when it comes to tax time. Accurate categorization impacts your COGS, gross profit, and taxable income. Supplies are deductible expenses, helping to reduce your tax liability, while inventory is a capital expense and only deducted when the finished items are sold.

Remember to maintain clear and organized records of your expenses, clearly labeling them as either inventory or supplies. This practice ensures compliance with tax regulations and maximizes your deductions, ultimately helping your Etsy business thrive while keeping your tax bill in check.

For information about classifying a purchase as Inventory or a direct COGS expense, see THIS PREVIOUS ARTICLE in the eRank Blog Archives.

NOTE: eRank is not a legal or tax official. This article is meant for informational purposes only. It is always best to check with your legal or tax representative for specific questions and advice.