Handmade Market Stallholders: Tax for Hong Kong Sellers on Pinkoi and Etsy

The Inland Revenue Department (IRD) issued its 2024-25 annual report in December 2024, revealing a 14% year-on-year increase in audit cases focused on e-commerce and online trading platforms. For the estimated 40,000 Hong Kong residents who sell handmade goods through platforms such as Pinkoi, Etsy, and Carousell, this signals a clear shift in enforcement priorities. The IRD has long maintained that the territorial source principle applies to all trading income, but the rise of platform-provided transaction data has made voluntary compliance a matter of when, not if. Sellers who treat their online side hustle as a tax-free hobby may face retrospective assessments, penalties, and, in extreme cases, prosecution under the Inland Revenue Ordinance (Cap. 112). This article provides a practical framework for handmade market stallholders and online sellers to understand their Hong Kong tax obligations, distinguish between hobby income and trade, and structure their operations for legal optimisation.

The Hobby vs. Trade Distinction: The IRD’s Decisive Factors

The foundational question for any handmade seller is whether their activity constitutes a “trade, profession, or business” under Section 14 of the Inland Revenue Ordinance (Cap. 112). If the activity is classified as a trade, all profits derived from Hong Kong are chargeable to profits tax at the standard rate of 16.5% (for corporations) or the progressive rate up to 15% (for unincorporated businesses). If the activity is classified as a hobby, no tax is due.

The IRD does not provide a fixed threshold; instead, it applies a series of common law tests derived from case law, most notably the “badges of trade” established in Commissioner of Inland Revenue v. N. V. Philips (1985) and subsequent Hong Kong court decisions. The six key factors are:

1. The subject matter of the transaction: Handmade goods are typically personal property, but the nature of the item matters. A single, high-value custom piece sold once a year is more likely to be a hobby than a regular run of 50 identical ceramic mugs sold monthly.
2. The frequency of transactions: The IRD’s 2023 Departmental Interpretation and Practice Notes (DIPN) No. 21 (Revised) on “Profits Tax – Source of Profits” explicitly states that “a systematic and repetitive pattern of transactions indicates a trade.” A seller who completes 10 or more transactions per month on Etsy is far more likely to be classified as trading than one who sells two items per year.
3. The length of ownership: Items held for a short period before sale (e.g., made-to-order jewellery shipped within days) point toward trade. Items held for years before a single sale (e.g., a vintage collection) point toward hobby.
4. An intention to make a profit: The seller’s own records matter. If the seller maintains a separate business bank account, tracks expenses, and prices items to cover costs plus a margin, the IRD will infer a profit motive. The IRD’s 2024-25 Annual Report notes that 73% of e-commerce audit cases involved sellers who maintained separate business records.
5. Supplementary work and marketing: Active marketing—running Etsy ads, maintaining a Pinkoi storefront, attending weekend markets, or building a social media following—indicates a trade. Passive listing without promotion leans toward hobby.
6. The manner of sale: Using a commercial platform (Pinkoi, Etsy, Amazon Handmade) with payment processing, shipping integration, and seller fees strongly suggests a trade. The IRD has access to transaction data from these platforms under the Inland Revenue Ordinance (Cap. 112), Section 51(4), which requires any person to furnish information on request.

Actionable takeaway: Any seller with more than 12 transactions per year, or who actively markets their products, should assume they are carrying on a trade. The burden of proof to show the activity is a hobby rests with the taxpayer.

Territorial Source Principle: Where the Profit Arises

Hong Kong’s territorial source principle under Section 14 of the Inland Revenue Ordinance (Cap. 112) means that only profits “arising in or derived from Hong Kong” are taxable. For handmade sellers, this depends on where the profit-generating activities occur.

Pinkoi (Taiwan-based Platform)

Pinkoi is headquartered in Taipei, Taiwan, and operates as a marketplace connecting sellers and buyers across Asia. For a Hong Kong resident seller on Pinkoi:

• If the buyer is in Hong Kong: The profit is sourced in Hong Kong. The contract of sale is formed in Hong Kong (the seller’s acceptance of the buyer’s offer occurs in Hong Kong), and delivery is within Hong Kong. Profits tax applies.
• If the buyer is in Taiwan, Japan, or another jurisdiction: The profit is sourced outside Hong Kong if the contract is concluded and delivery occurs outside Hong Kong. The seller must be able to demonstrate that the contract was accepted outside Hong Kong and that the goods were shipped directly from Hong Kong to the buyer’s address abroad. The IRD’s 2023 DIPN No. 21 (Revised) states that “the location where the contract is concluded is a strong indicator of the source of profits.” A seller who accepts orders via Pinkoi’s system from a Hong Kong IP address is likely to have the contract concluded in Hong Kong, regardless of the buyer’s location.

Etsy (US-based Platform)

Etsy is headquartered in Brooklyn, New York. For a Hong Kong resident seller on Etsy:

• If the buyer is in Hong Kong: The profit is sourced in Hong Kong. Same reasoning as Pinkoi.
• If the buyer is in the United States, Europe, or another jurisdiction: The profit is sourced outside Hong Kong if the contract is concluded and delivery occurs outside Hong Kong. However, the IRD may argue that the “operations test” applies: if the seller’s core activities (designing, making, packaging, and shipping) all occur in Hong Kong, the profit may be deemed to arise in Hong Kong regardless of where the buyer is located. This is a grey area. The Hong Kong Court of Final Appeal in Commissioner of Inland Revenue v. Hang Seng Bank Ltd (1991) established that the “operations test” looks at where the income-producing operations take place. For a handmade seller, the production is in Hong Kong, so the profit may be sourced in Hong Kong even for export sales.

Practical approach: Most Hong Kong handmade sellers will find that all their profits are sourced in Hong Kong, because the production and dispatch occur here. The safest position is to declare all profits and claim the offshore profits exemption only if you can clearly demonstrate that both the contract and delivery occur outside Hong Kong, and that no Hong Kong operations are involved in the sale.

Profits Tax Computation for the Handmade Seller

Once the activity is classified as a trade, the seller must compute assessable profits. For unincorporated businesses (sole proprietors or partnerships), the first HKD 2,000,000 of assessable profits are taxed at 8.25% (half the standard rate) under the two-tiered profits tax regime introduced in 2018. Profits above HKD 2,000,000 are taxed at 16.5%.

Allowable Deductions

Section 16 of the Inland Revenue Ordinance (Cap. 112) allows deductions for all expenses “wholly and exclusively” incurred in the production of assessable profits. Common deductions for handmade sellers include:

• Cost of raw materials: Fabric, yarn, clay, beads, packaging, labels. Keep all receipts.
• Platform fees: Etsy listing fees (USD 0.20 per item), transaction fees (6.5% of sale price), payment processing fees (3% + USD 0.25). Pinkoi charges a 15% commission on each sale. These are deductible.
• Shipping costs: Postage, courier fees, packaging materials. The IRD allows deduction for shipping to buyers, provided the shipping is from Hong Kong.
• Equipment: Sewing machines, kilns, 3D printers, computers, cameras. If the equipment is used exclusively for the business, the full cost can be claimed under the annual allowance (depreciation) system. For assets costing less than HKD 100,000, the IRD allows a 100% deduction in the year of purchase under the “small tools and plant” concession.
• Home office expenses: A portion of rent, utilities, and internet costs can be claimed if a specific area of the home is used exclusively for the business. The IRD’s 2022 practice note on home office deductions requires a “clear and identifiable” space. A dedicated desk in a shared bedroom is unlikely to qualify; a separate room used as a studio is more defensible.
• Market stall fees: Fees for weekend markets, craft fairs, and pop-up events are deductible.
• Professional fees: Accountant fees for preparing tax returns, legal fees for trademark registration.

Personal Allowances and Salaries Tax Interaction

If the seller operates as a sole proprietor, the profits from the handmade business are taxed under Profits Tax, not Salaries Tax. However, if the seller also has employment income, the two are separate. The seller cannot use personal allowances (e.g., the HKD 132,000 basic allowance for 2024-25) to reduce profits tax liability. Personal allowances apply only to Salaries Tax and Personal Assessment.

Personal Assessment election: Section 41 of the Inland Revenue Ordinance (Cap. 112) allows a taxpayer to elect Personal Assessment, which aggregates all income (employment, business, property) and applies personal allowances. For a seller with employment income below the basic allowance and a small handmade business, Personal Assessment may result in no tax due. For a seller with high employment income, Personal Assessment is usually disadvantageous because it exposes business profits to the higher Salaries Tax progressive rates (up to 17%).

Registration and Filing Obligations

Business Registration

Section 5 of the Business Registration Ordinance (Cap. 310) requires any person carrying on a business in Hong Kong to register within one month of commencement. The fee for 2024-25 is HKD 2,150 per year (or HKD 3,950 for a three-year certificate). Failure to register can result in a fine of up to HKD 5,000 and imprisonment for one year.

Threshold for exemption: A business is exempt from registration if it is “carried on in a small way” and the IRD is satisfied that the business does not generate profits. In practice, the IRD rarely grants this exemption. The safe approach is to register as soon as you have any sales, even if the amount is small.

Profits Tax Return (Form BIR51)

Once registered, the seller will receive a Profits Tax Return (Form BIR51 for sole proprietors) annually, usually in April. The return must be filed within one month (extendable to two months upon request). The return requires the seller to declare:

• Gross sales revenue from all platforms (Pinkoi, Etsy, Carousell, market stalls).
• Cost of goods sold.
• Allowable expenses.
• Net assessable profits.

The IRD’s 2024-25 Annual Report indicates that 92% of e-commerce audit cases involved discrepancies between platform-reported revenue and declared revenue. The IRD has access to transaction data from Pinkoi and Etsy under the Inland Revenue Ordinance (Cap. 112), Section 51(4). Sellers should expect their declared revenue to be cross-checked against platform data.

Record-Keeping Requirements

Section 51C of the Inland Revenue Ordinance (Cap. 112) requires every person carrying on a business to keep sufficient records for at least seven years. For handmade sellers, this means:

• Sales records: Platform transaction reports, bank statements, PayPal/Stripe statements.
• Purchase records: Receipts for raw materials, equipment, shipping supplies.
• Expense records: Receipts for platform fees, shipping costs, market stall fees.
• Correspondence: Emails with buyers, platform communications.

Failure to keep records can result in a fine of up to HKD 100,000 and imprisonment for six months.

Structuring for Legal Optimisation

For sellers whose handmade business generates consistent profits above HKD 200,000 per year, incorporation as a private limited company may offer tax advantages. The two-tiered profits tax regime applies to corporations as well, with the first HKD 2,000,000 taxed at 8.25% and the remainder at 16.5%. However, a company must file audited accounts if its annual turnover exceeds HKD 10,000,000, which adds compliance costs.

Sole proprietorship vs. company: For most handmade sellers with annual profits below HKD 1,000,000, a sole proprietorship is simpler and cheaper. The seller can claim the full HKD 132,000 basic allowance under Personal Assessment (if applicable) and does not need audited accounts. For sellers with profits above HKD 1,000,000, incorporation may be worthwhile to access the lower corporate tax rate on the first HKD 2,000,000 of profits.

MPF considerations: A sole proprietor is not required to make MPF contributions for themselves, but must enrol employees (including part-time helpers) in an MPF scheme if they have been employed for 60 days or more. The mandatory contribution is 5% of relevant income, capped at HKD 1,500 per month per employee (for 2024-25). Failure to enrol employees can result in a fine of up to HKD 350,000 and imprisonment for three years under the Mandatory Provident Fund Schemes Ordinance (Cap. 485).

Actionable Takeaways

1. Register your business with the IRD as soon as you have any sales — the Business Registration Ordinance (Cap. 310) requires it within one month, and the HKD 2,150 annual fee is a deductible expense.
2. Maintain a separate business bank account and keep all platform transaction reports — the IRD has access to Pinkoi and Etsy data, and discrepancies trigger audits that can reach back seven years under Section 51C of the Inland Revenue Ordinance (Cap. 112).
3. Assume all your profits are sourced in Hong Kong — unless you can clearly demonstrate that both the contract and delivery occur outside Hong Kong, the territorial source principle will likely treat your export sales as taxable.
4. Claim all allowable deductions, including platform fees, shipping costs, and a portion of home office expenses — Section 16 of the Inland Revenue Ordinance (Cap. 112) allows deductions for expenses wholly and exclusively incurred in producing assessable profits.
5. Consider Personal Assessment if you have low employment income — Section 41 of the Inland Revenue Ordinance (Cap. 112) allows you to aggregate all income and apply personal allowances, which may eliminate your tax liability entirely.

本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.