In 2026, any money you earn from a hobby — whether it’s selling crafts, photography, writing, collecting, or anything else — is taxable income. But unlike a business, you can’t deduct hobby expenses to reduce that income. The IRS draws a strict line between “hobby” and “business” — and which side you land on determines how you’re taxed.
Key takeaway: All hobby income is taxable with no offsetting deductions allowed in 2026. If your activity generates regular losses you want to deduct, you must demonstrate to the IRS that it’s a legitimate for-profit business.
Hobby vs. Business: The Tax Difference
| Hobby | Business | |
|---|---|---|
| Income taxable? | Yes | Yes |
| Expenses deductible? | No (since 2018) | Yes (Schedule C) |
| Losses can offset other income? | No | Yes |
| Self-employment tax applies? | No | Yes (15.3% on net profit) |
| Report on | Schedule 1, Line 8 | Schedule C |
Example: You sell handmade candles on Etsy as a side hobby.
- Revenue: $4,500
- Supplies and materials: $2,800
- Shipping and Etsy fees: $600
- Total expenses: $3,400
As a hobby: You report $4,500 as income. You can’t deduct $3,400 in expenses. You pay income tax on $4,500.
As a business: You report $4,500 income, deduct $3,400 expenses = $1,100 net profit. You pay income tax + 15.3% self-employment tax on $1,100.
Note: Even as a business, you pay more total tax per dollar of profit — but you can deduct losses in losing years.
The IRS 9-Factor Test: Hobby or Business?
The IRS uses these factors to determine if an activity is pursued for profit:
| Factor | What the IRS Looks For |
|---|---|
| 1. Businesslike manner | Do you keep records, have a separate bank account, and operate professionally? |
| 2. Time and effort | Do you devote significant time to it? Do you have advisors or employees? |
| 3. Livelihood dependence | Do you depend on this income for living expenses? |
| 4. Losses are normal | Are losses typical for the startup phase of this type of business? |
| 5. Changes in methods | Have you modified operations to improve profitability? |
| 6. Your expertise | Do you have knowledge or expertise in this area? |
| 7. History of income/losses | Has the activity been profitable in prior years? |
| 8. Occasional profits | How significant and occasional are profits relative to losses? |
| 9. Future appreciation | Is there an expectation of future profit through asset appreciation? |
No single factor is determinative. The IRS weighs all nine.
The Safe Harbor Presumption
The IRS presumes an activity is a for-profit business if it shows a profit in at least 3 of the past 5 consecutive years (or 2 of 7 years for horse breeding/racing).
This is a presumption — not a guarantee. The IRS can still challenge the business status if other factors suggest a hobby, and vice versa (you can rebut the presumption if you have consistent losses but strong other factors).
How to Prove Your Activity Is a Business
If you want to deduct losses, take these steps to document business intent:
- Open a separate business bank account — never commingle personal and business funds
- Keep detailed records — income, expenses, mileage, receipts
- Create a business plan — document your profit strategy even informally
- File as a business from the start — use Schedule C and an EIN
- Pursue the activity seriously — regular hours, marketing, customer acquisition
- Make year-over-year improvements — adjust your approach when you’re losing money
- Consult experts — advisors, accountants, or industry professionals
Reporting Hobby Income in 2026
Hobby income is reported on Schedule 1, Part I, Line 8 (Other Income) of your Form 1040. Label it clearly (e.g., “Hobby income — Etsy sales: $4,500”).
1099 forms: If a platform (Etsy, eBay, PayPal) pays you more than $5,000 in 2025 (the threshold for 2025 1099-K reporting), they’ll issue a 1099-K. The IRS receives a copy — failing to report matching income is an audit risk.
Note: The $5,000 threshold for 2025 is still phasing in from the original $600 threshold under the American Rescue Plan. Check IRS.gov for the current year’s threshold.
Common Hobbies the IRS Scrutinizes
- Horse racing and breeding — historically high loss rates; special 2-of-7 safe harbor
- Art and photography — subjective valuation makes expense claims easy to inflate
- Vacation rental — unclear personal vs. rental use
- Collectibles dealing — coin, stamp, and antique dealers with suspicious losses
- Farming/ranching — consistent losses against high other income
Related Resources
- Self-Employment Taxes Guide — all freelance and side income tax topics
- Freelancer Tax Guide — self-employment basics
- How to Report Freelance Income — Schedule C walkthrough
- Side Income Taxes — all gig economy and side hustle topics
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