Trade in has an optional tax credit setting, allowing to generate a tax credit for the value of your trade in.

Setup tax Class

In the Advanced settings_>Register Settings you can now choose which product tax class will the trade in items belong and system will use that tax class to calculate tax for the traded in item:

Trade Ins

You can take a simple credit only trade in or create an item for resale. Either way the trade in line will show a tax credit based on the tax rule for that customer, store location and product tax class.

Register Reports 

Trade in will not effect sales – Trad ein is shown separate form net sales and trade in tax credit is shown separately as well

Sales Tax Reports 

Sales Tax by Store and Sales Tax by Jurisdiction shows Trade in Tax credits as a separate item.