How to Report Hobby Income on Your Taxes

Understanding how to report income from activities pursued for enjoyment, often referred to as hobbies, is important for taxpayers. Many individuals engage in creative or recreational pursuits that, perhaps unexpectedly, generate revenue. The Internal Revenue Service (IRS) has specific guidelines for how this income is handled, distinguishing it from business income. Proper reporting ensures compliance with tax regulations, which can prevent potential issues during tax filing. This guidance helps clarify the tax implications for those who earn money from their passions.

Determining if an Activity is a Hobby or Business

Distinguishing between a hobby and a business for tax purposes is a foundational step, as this classification determines how both income and expenses are treated on a tax return. The Internal Revenue Service (IRS) considers several factors to ascertain whether an activity is engaged in for profit or simply for personal pleasure. No single factor is decisive; instead, the IRS examines all facts and circumstances surrounding the activity.

The IRS considers several factors to determine if an activity is a business or a hobby. These include whether the activity is conducted in a businesslike manner, with accurate records, and the time and effort expended to make it profitable. The taxpayer’s expertise and success in similar activities are also considered. Other factors include the history of income or losses, the amount of occasional profits, and the taxpayer’s financial status, especially if they depend on the income for livelihood.

The IRS also examines if losses are due to uncontrollable circumstances or are typical for a startup. Finally, the presence of personal pleasure or recreation elements may indicate a hobby. This distinction dictates whether expenses can be deducted and if self-employment taxes apply.

Reporting Gross Hobby Income

Once an activity is classified as a hobby, all gross income generated from it must be reported on a tax return. This requirement applies regardless of the amount earned or whether any expenses were incurred in the process. Taxpayers cannot offset hobby income with hobby expenses before reporting the gross amount.

This income is typically reported on Form 1040, Schedule 1, specifically on Line 8, designated as “Other Income.” This line serves as a catch-all for various income types not reported elsewhere on the main Form 1040. For example, if an individual sells crafts online or at local fairs, the total receipts from these sales would constitute the gross hobby income to be reported.

Understanding Hobby Expense Deductions

The deductibility of expenses related to hobby income has undergone significant changes in recent years. Historically, hobby expenses were treated as miscellaneous itemized deductions on Schedule A of Form 1040. These deductions were subject to a 2% adjusted gross income (AGI) limitation, meaning only the amount exceeding 2% of the taxpayer’s AGI could be deducted. Furthermore, these deductions could not exceed the gross income generated by the hobby.

A significant shift occurred with the Tax Cuts and Jobs Act (TCJA) of 2017. This legislation suspended miscellaneous itemized deductions, including hobby expenses, for tax years 2018 through 2025. Consequently, individuals generally cannot deduct any expenses incurred in connection with their hobbies for federal income tax purposes during this period. Despite this, the gross income derived from the hobby remains fully taxable. If the TCJA provisions sunset as scheduled, hobby expenses might again become deductible under prior rules starting in 2026.