This one sounds simple. You have an item, you find the category that best describes the item, and you’re done with it. To be fair, sometimes it is that simple. If you have Singin’ in the Rain on DVD, you put it in the “DVDs & Movies: DVD” category, no questions asked.
What if you have a model of an American Airlines jet? Does it go in the “Collectibles: Transportation: Aviation: Airlines: American” category, or the “Toys & Hobbies: Models: Air” category?
Where you put your item should be dictated by where the highest number of potential bidders will look for it. Search the completed auction listings to get an idea of which items are in what categories, and for those categories that have a higher success rate. In the American jet model example, if there are more bidders traipsing through the Collectibles category, put it there; if there are more potential buyers who think of this as a model toy thing, put it in that category. (In reality, you’ll probably find listings for this sort of item in both categories.) Think like your potential buyers, and put it where you would look for it if you were them.
If you really can’t decide if your item really does belong in more than one category eBay lets you list your item in two categories. It costs twice the regular listing fee, but it potentially doubles your exposure. Just scroll down to the Second Category section on the Category page, and enter a second category. Your item listing will show up in both categories, just like that.