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-K forms: If a payment platform (Etsy, eBay, PayPal, Venmo) processes your hobby sales, they’ll issue a 1099-K only if you received over $20,000 AND had more than 200 transactions in the year — both conditions must be met. This threshold applies for the 2025 tax year (filed 2026) and going forward, after the One Big Beautiful Bill Act (OBBBA), signed July 2025, permanently reverted the reporting threshold back to $20,000/200 transactions (repealing a lower $600 threshold that had been enacted but never fully took effect).
Important: Even if you’re under the $20,000/200-transaction threshold and don’t receive a 1099-K, your hobby income is still fully taxable and must be reported. The 1099-K threshold only determines whether the platform is required to report to the IRS — it does not create a tax exemption for you.
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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