Topic 09 · 5 min read

Hobby Income and Hobby Losses

Fun pays tax; only a business gets to deduct.

If you sell what you make, the money is taxable whether the activity is a business or a hobby. The difference shows up on the expense side: a business deducts its costs and can show a loss, while a hobby currently deducts nothing at all.

What to know

Income is reported either way

Payments from marketplaces, apps, and customers are taxable income even for a casual side activity.

Hobby expenses are not deductible

The deduction for hobby expenses was suspended, so a hobby can be taxed on its gross receipts with no offset for supplies.

The profit-motive factors

The IRS weighs businesslike records, expertise, time devoted, history of profit, and whether losses are due to start-up phases or simply enjoyment.

The three-of-five presumption

Showing a profit in three of five consecutive years generally presumes a business — helpful, but not required and not conclusive.

Look like a business

A separate bank account, a written plan, pricing that could produce profit, and real bookkeeping do more than any label.

Watch out for

• Years of losses with little effort to change course invite reclassification as a hobby.
• Business treatment also brings self-employment tax on the profit.
• Deducting personal enjoyment costs is the fastest way to lose an audit.