Define: Hobby Loss

Hobby loss refers to a situation where an individual claims tax deductions for expenses incurred in pursuing an activity that the Internal Revenue Service (IRS) considers to be a hobby rather than a business. In the eyes of the IRS, a hobby is an activity primarily undertaken for pleasure, recreation, or personal satisfaction, rather than with the primary intent of making a profit. Taxpayers cannot deduct hobby losses to reduce their taxable income, but they can deduct hobby expenses up to the amount of income generated by the hobby. However, if the IRS determines that an activity is actually a business rather than a hobby, taxpayers may be able to claim deductions for business expenses and losses, subject to certain rules and limitations. It’s essential for taxpayers to accurately classify their activities to avoid potential penalties and disputes with the IRS regarding hobby losses.

“Hobby loss” refers to the IRS rule that prevents individuals from deducting losses incurred from activities that are not engaged in for profit. If an activity is considered a hobby rather than a business, any expenses associated with it cannot be used to offset other income for tax purposes. To determine if an activity is a hobby or a business, the IRS looks at various factors, including the manner in which the activity is conducted and whether there is an intention to make a profit. If an activity consistently generates losses and lacks a profit motive, it is likely classified as a hobby.

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This glossary post was last updated: 28th April 2024.