Is Your Activity a Hobby or a Business?

Many people enjoy hobbies that occasionally generate extra income. Whether you sell crafts online, breed animals, create artwork, restore cars, or engage in other income-producing activities, it's important to understand whether the IRS considers your activity a hobby or a business.

The distinction matters because businesses and hobbies are taxed differently.

What's the Difference?

A business is conducted with the primary goal of making a profit. A hobby is pursued mainly for personal enjoyment, recreation, or pleasure, even if it occasionally produces income.

The IRS looks at the facts and circumstances surrounding the activity. No single factor determines whether an activity is a hobby or a business.

Questions to Consider

When evaluating your activity, ask yourself:

Do you intend to make a profit?

Has the activity generated profits, and if so, how much?

Do you expect future profits from appreciation of assets used in the activity?

Do you rely on income from the activity to support your livelihood?

Are losses due to circumstances beyond your control, or are they typical startup losses for your industry?

Have you changed operations or methods to improve profitability?

Do you maintain complete and accurate books and records?

Do you or your advisors possess the knowledge and expertise necessary to operate the activity successfully?

Recordkeeping Is Essential

Regardless of whether your activity is classified as a hobby or a business, maintaining good records is critical. Keep documentation of income, expenses, receipts, bank statements, and other relevant records throughout the year.

Payment Apps and Tax Reporting

Individuals who receive payments through payment apps or online platforms for goods or services may receive Form 1099-K. These payments are generally considered taxable income and must be reported on your federal income tax return.

Taxpayers who receive compensation in the form of digital assets may also receive Form 1099-DA reporting those transactions.

Need Help Determining Your Status?

Determining whether an activity qualifies as a business or a hobby can have significant tax consequences. If you have questions about how your activity should be reported, contact our office. We can help you evaluate your situation and ensure you remain compliant with IRS requirements while taking advantage of all available tax benefits.