Consignment works like this: you hand your items to a shop to sell on your behalf, you keep ownership until a buyer pays, and the shop takes an agreed percentage of the sale price as its commission. You never run a register, stage a display, or negotiate with a buyer. The shop does all of that and settles with you after the sale closes. What trips people up is everything around that simple arrangement — who owns the goods if the shop goes under, which items are illegal to resell at all, and how the IRS treats the money that lands in your account.
What Consignment Actually Is
The defining feature is split possession and ownership. The shop possesses, displays, and sells your goods, but it never buys them from you. That is the clean line between consignment and wholesale: a wholesaler buys inventory outright and bears the risk of it not selling, while a consignor only transfers physical possession and gets paid when, and if, a buyer shows up.
The appeal on both sides is obvious. You reach retail customers without a storefront. The shop fills its floor without laying out cash for inventory. The trade-off is the commission and the fact that your money is tied up in goods someone else controls.
The Written Agreement
Every consignment arrangement should start with a signed contract, and the number that matters most is the commission split. For clothing and household goods, splits usually fall between 50/50 and 60/40 in the consignor’s favor. For higher-value categories like fine art, jewelry, or luxury vehicles, the consignor keeps more and the shop takes 10% to 20%.
The agreement also sets the initial asking price and what happens if the item lingers. Many contracts include an automatic markdown clause that drops the price by 10% to 25% after about 30 days unsold. Contract terms themselves typically run 60 to 90 days. At the end of that window, you either collect any unsold items or the contract tells you what the shop does with them.
Insist on a detailed intake record: a description, brand name, serial number, measurements, and documented condition for each item. That record is what you fall back on if there’s a dispute later about whether damage happened before or during the shop’s possession.
From Drop-Off to Payout
At intake, staff check each item against the condition report and issue a receipt. Each piece gets an internal tracking number, usually a scannable tag tied to your consignor account, so the shop can trace it through its system. From there the shop cleans, stages, and prices the item, handles every buyer interaction, and closes the sale through its own register.
Payment to you is almost never same-day. Most shops run a monthly settlement cycle: items sold in one month are paid out in the first week of the next, by check or electronic transfer, with a statement listing what sold, when, at what price, and what commission came off the top. Some shops offer store credit in place of cash and sweeten it with a bonus, often around 10% more than the cash figure.
If an item doesn’t sell within the contract period, you have to pick it up. Leaving it too long can mean daily storage fees, or the shop may donate or liquidate it under the terms you already signed.
Who Owns the Goods During Consignment
You hold legal title the whole time. The shop possesses the goods and sells them on your behalf, but ownership stays with you. That sounds like strong protection and in everyday situations it is.
The catch is what happens if the shop runs into financial trouble. Under the Uniform Commercial Code, a consignment of goods worth $1,000 or more per delivery is treated much like a secured transaction. If you haven’t taken specific steps to “perfect” your interest, the law treats the shop as if it owns the goods for the purpose of creditor claims. If the shop is sued or files bankruptcy, its creditors can reach your inventory even though you technically own it.1Cornell Law School. UCC 9-102 – Definitions and Index of Definitions
Protecting Valuable Items If the Shop Fails
To keep the shop’s creditors away from your goods, you file a UCC-1 financing statement with the secretary of state where the shop is organized. That puts the world on notice that you hold a security interest in the specific items. To get priority over any lender that already has a blanket lien on the shop’s inventory, you also send written notice to those prior secured creditors before you deliver the goods, describing the items and stating that you hold or will hold a purchase money security interest.2Cornell Law School. UCC – Article 9 – Secured Transactions (2010)
For a few bags of used clothing this is overkill. For fine art, luxury watches, or vintage cars, the filing fee of roughly $20 to $50 is cheap insurance against losing the property in someone else’s bankruptcy. If you did file and notify properly, you can reclaim your goods from the bankruptcy estate as a secured party. If you didn’t, you drop to the back of the line as a general unsecured creditor, and unsecured creditors in retail bankruptcies tend to recover pennies on the dollar if they recover anything.
Items You Can’t Legally Consign
Consignment shops are not exempt from federal resale prohibitions, and neither are you as the person supplying the goods.
Recalled products are off limits. Under the Consumer Product Safety Act it is illegal to sell any product that has been recalled, and the ban reaches resellers.3CPSC. Stopping the Online Sale of Recalled Products Children’s items get the tightest scrutiny: drop-side cribs are banned outright, children’s products exceeding set lead limits can’t be resold, and small-parts rules apply to anything meant for children under three. The CPSC runs a searchable recall database, and the sensible step is to check your own items before you drop them off.4CPSC. Resellers Guide to Selling Safer Products
Counterfeits carry the heaviest exposure. Trafficking in counterfeit goods, which includes a handbag with a fake designer logo or a watch stamped with a brand name it doesn’t belong to, is punishable by up to $2 million in fines and 10 years in prison for a first offense, and up to $5 million and 20 years for a second.5Office of the Law Revision Counsel. 18 USC 2320 – Trafficking in Counterfeit Goods or Services The trademark owner can also sue civilly. Most consignment agreements make the consignor guarantee authenticity and accept full liability if an item turns out to be fake.
Taxes on Consignment Income
How you report the money depends on what you’re actually doing.
If you’re clearing out personal belongings and selling them for less than you originally paid, you owe no tax. A loss on personal property isn’t deductible, but it isn’t taxable income either. If a 1099-K lands in your mailbox, report it and offset it with your cost basis to show no gain.6Internal Revenue Service. What to Do With Form 1099-K If a personal item sells for more than you paid, the profit is a capital gain and has to be reported.
Consigning in volume with the intent to profit, or buying things specifically to resell, moves you into business territory. The IRS weighs factors like recordkeeping, businesslike operation, and whether you rely on the activity for income.7Internal Revenue Service. Know the Difference Between a Hobby and a Business A business reports income and expenses on Schedule C and can deduct commissions, transportation, supplies, and a share of home office costs for activities like photographing or staging items.8Internal Revenue Service. Instructions for Schedule C (Form 1040) (2025) If the activity looks more like a hobby, the income is still taxable but hobby losses can’t offset other income.
Shops and payment processors must send a 1099-K when gross payments exceed $20,000 across more than 200 transactions in a calendar year.9Internal Revenue Service. IRS Revises and Updates Form 1099-K Frequently Asked Questions Below those thresholds you may get no form, but income above your cost basis is still reportable. Sales tax is almost always the shop’s problem: it acts as the seller at the register and remits tax under its own filings, so your payout is already net of commission and separate from the tax the buyer paid.
If Your Item Is Damaged or Stolen
While your goods sit in the shop, the shop is responsible for their physical safety. Most agreements require the shop to carry commercial insurance covering theft, fire, and accidental damage, and a well-drafted contract names you as a loss payee so proceeds flow directly to you rather than through the shop’s finances. If an item is damaged or stolen on display, the shop typically owes you what you would have received had it sold at its current listed price.
This is where the intake condition report earns its keep. Without a documented record of what the item looked like when you dropped it off, arguments about pre-existing versus in-store damage have no anchor. Before you sign, ask for proof of insurance and confirm that the policy covers consigned goods specifically, not just the shop’s own property.