Quick Answer
Yes, materials and supplies used to create products for your Etsy shop are 100% deductible business expenses. The average Etsy seller can deduct $2,000-$5,000 annually in materials, including fabric, yarn, packaging supplies, and shipping materials used exclusively for business purposes.
Best Answer
Alex Torres, Former rideshare driver turned tax educator
Best for established Etsy shop owners tracking significant material costs
What materials and supplies can I deduct?
Absolutely — materials and supplies used to create products for your Etsy shop are 100% deductible business expenses. According to IRS Publication 535, any ordinary and necessary expenses for your business operations qualify for deduction, including raw materials, packaging, and shipping supplies.
Example: Jewelry maker's annual deductions
Let's say you run an Etsy jewelry shop and spend:
Total deductible materials: $2,700
If you're in the 22% tax bracket, this saves you approximately $594 in federal taxes, plus additional state tax savings.
Materials vs. inventory: What's the difference?
Key factors that affect your deductions
What you should do
1. Track everything: Keep receipts for all material purchases, even small ones
2. Separate personal from business: Use different payment methods or clearly mark business purchases
3. Calculate business-use percentage: If materials serve dual purposes, document the split
4. Consider inventory methods: Talk to a tax professional about whether FIFO, LIFO, or specific identification works best
[Use our deduction finder](deduction-finder) to identify all eligible material expenses and estimate your tax savings →
Key takeaway: Materials and supplies used exclusively for your Etsy business are fully deductible, potentially saving sellers $500-$1,500 annually in taxes depending on their spending and tax bracket.
*Sources: [IRS Publication 535](https://www.irs.gov/pub/irs-pdf/p535.pdf), IRC Section 162*
Key Takeaway: Materials and supplies used exclusively for your Etsy business are fully deductible, potentially saving $500-$1,500 annually in taxes.
Common Etsy materials and their deductibility status
| Material Type | Deductible? | Notes |
|---|---|---|
| Raw materials (fabric, beads, wood) | 100% | If used exclusively for business |
| Packaging supplies | 100% | Boxes, bags, labels, tissue paper |
| Shipping materials | 100% | Bubble mailers, tape, packing materials |
| Tools under $2,500 | 100% | Can expense immediately or depreciate |
| Mixed-use supplies | Partial | Only business percentage deductible |
| Personal craft supplies | 0% | Cannot deduct personal hobby materials |
More Perspectives
James Okafor, EA, EA
Best for first-time Etsy sellers learning about business deductions
Yes, but let's keep it simple for your first year
As a new Etsy seller, you can deduct materials and supplies — this is actually one of the easiest deductions to understand and track. The IRS considers these "ordinary and necessary" business expenses under IRC Section 162.
Start with the basics
For your first year, focus on deducting:
Don't worry about complex inventory accounting yet. If you buy $50 of beads and use them all this year, deduct $50.
Simple tracking method
Create a basic spreadsheet with columns for:
Example first-year deductions for a small craft business: $800-$2,000 in materials typically saves $200-$500 in taxes.
What to avoid in year one
Don't stress about:
Keep it simple, track consistently, and you'll be fine.
Key takeaway: New Etsy sellers should track all material purchases — even small amounts add up to significant tax savings over the year.
Key Takeaway: New Etsy sellers should track all material purchases — even small amounts add up to significant tax savings.
Alex Torres, Former rideshare driver turned tax educator
Best for people running an Etsy shop alongside their regular job
Yes, and it's especially valuable for side hustlers
Your Etsy shop materials are deductible business expenses, even if it's just a side hustle. This can be particularly valuable because these deductions reduce your self-employment income, lowering both income tax and self-employment tax.
The dual-use challenge
As a side hustler, you might buy supplies that serve both personal and business purposes. The key is tracking business use percentage:
Example: Side hustle material savings
If you're in the 22% tax bracket and spend $1,500 on materials:
This assumes you're above the $400 self-employment threshold and paying the full 14.13% self-employment tax rate.
Organization tips for busy side hustlers
1. Use separate payment methods: Dedicated business credit card makes tracking easier
2. Take photos of receipts: Use apps like Expensify or just your phone camera
3. Monthly review: Spend 30 minutes monthly categorizing expenses rather than waiting until tax time
[Track your expenses with our freelance dashboard](freelance-dashboard) to automatically calculate your deductions →
Key takeaway: Side hustlers benefit from material deductions on both income tax and self-employment tax, often saving 30%+ on business-related material costs.
Key Takeaway: Side hustlers benefit from material deductions on both income tax and self-employment tax, often saving 30%+ on material costs.
Sources
- IRS Publication 535 — Business Expenses
Related Questions
Reviewed by James Okafor, EA on February 28, 2026
This content is for educational purposes only and is not a substitute for professional tax advice. Consult a qualified tax professional for advice specific to your situation.