Plenty of people earn a little money from something they enjoy. Selling on the side, flipping collectibles, renting out gear, monetizing a channel. The IRS draws a line between a hobby and a business, and where you land changes how the income gets taxed. Through the 2025 tax year, getting it wrong is more expensive than most people expect.
The nine factors the IRS weighs
There is no single test. Under Section 183 of the tax code and its regulations, the IRS looks at the whole picture using nine factors:
- Whether you run the activity in a businesslike way, with complete and accurate books.
- Whether the time and effort you put in show an intent to make a profit.
- Whether you depend on the income for your livelihood.
- Whether losses are normal startup losses or beyond your control, rather than ongoing.
- Whether you change methods to improve profitability.
- Whether you and your advisors have the knowledge to run it as a successful business.
- Whether you were profitable in similar activities before.
- Whether the activity makes a profit in some years, and how much.
- Whether you can expect future profit from the appreciation of assets used in the activity.
No one factor decides it. There is a helpful safe harbor, though: an activity is presumed to be for profit if it turns a profit in at least three of the last five consecutive years.
Why the answer costs more through 2025
Here is the part that catches people. A real business reports income and deducts ordinary and necessary expenses against it. A hobby does not get that treatment. The 2017 tax law suspended miscellaneous itemized deductions from 2018 through 2025, and hobby expenses fell into that bucket. So for a hobby in these years, you report all of the income, on Schedule 1 of Form 1040, and you deduct essentially none of the expenses.
The coin collector example makes it concrete. Sell coins at a profit and you report the profit. Buy coins that turn out to be worthless and, as a hobbyist, you cannot offset the loss. Same dollars in and out, very different tax result depending on which side of the line you sit.
The forms that show up regardless
Whether you call it a hobby or a business, the paperwork may arrive either way. If you took payments through a payment app or card processor for goods and services, you may receive a Form 1099-K, and that income is taxable and reportable. If you were paid in digital assets, you may get a Form 1099-DA. Good records throughout the year, what you brought in and what you spent, are what let you report correctly and make the hobby-or-business case if the IRS ever asks.
How BCA fits
The hobby-or-business question is rarely obvious at the edges, and the cost of the wrong call is real. BCA helps owners and individuals set up businesslike records, weigh the nine factors honestly against their own facts, and decide whether an activity is ready to be treated as a business. We bring business and compliance experience to that judgment and coordinate with a trusted tax preparer or tax advisor when it is time to file.
Sources
- IRS Tax Tip 2026-45, “Is that activity just a hobby or a business?” https://www.irs.gov/newsroom/is-that-activity-just-a-hobby-or-a-business
- IRS, “Earning side income: Is it a hobby or a business?” https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business
- Internal Revenue Code Section 183 and Treasury Regulation 1.183-2 (activities not engaged in for profit). https://www.irs.gov/pub/irs-pdf/p535.pdf
- The Tax Adviser, “Avoiding the hobby loss trap after the TCJA.” https://www.thetaxadviser.com/issues/2018/nov/avoiding-hobby-loss-trap-after-tcja/
This information is provided for general educational purposes and reflects opinions based on experience. It is not licensed legal, tax, or financial advice. The hobby-or-business determination depends on the specific facts of each activity, and information-reporting thresholds change. We refer to and partner with licensed professionals when personalized advice is needed. Laws change, and we make no warranty of accuracy or timeliness.