Maybe I'm wrong, but a 1099 from the IRS simply means that you have more than $600 in "income". Key word being income. Income does not equate to profit, which is what you get taxed on. I have kept track of what I paid for chips, postage, supplies etc for years. These as Walter said, can be deducted from your income (or revenue) and you may actually end up owing a lot less than what ebay reports on your 1099. You may even not owe anything. Schedule C is where you declare income & expenses.

I don't believe taking funds out or leaving them in Paypal has any bearing on the issuance of a 1099.