Many people are engaged in hobby activities that are also a source of income. For example, some people started selling handmade items during the pandemic. These people must report this income on their tax return.
A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. This differs from those that operate a business with the intention of making a profit.
In determining whether their activity is a business or hobby, taxpayers must consider nine factors.
These factors are:
- Whether the activity is carried out in a businesslike manner and the taxpayer maintains complete and accurate books and records.
- Whether the time and effort the taxpayer puts into the activity show they intend to make it profitable.
- Whether they depend on income from the activity for their livelihood.
- Whether any losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
- Whether they change methods of operation to improve profitability.
- Whether the taxpayer and their advisors have the knowledge needed to carry out the activity as a successful business.
- Whether the taxpayer was successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether the taxpayers can expect to make a future profit from the appreciation of the assets used in the activity.
- All factors, facts and circumstances with respect to the activity must be considered. And, no one factor is more important than another.
If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040, line 8.
