For millions of people, their biggest hobbies also double as a source of income. For example, some may buy and sell collectible coins, while others take their handmade crafts to trade shows. If you make an income from your hobby, however, you still must report this on your tax return. Much like a business, there are special rules and limits for tax deductions that you can claim for your hobby.
This is why the IRS Small Business blog created an easy list of 'Five Basic Tax Tips about Hobbies'
1. Determine whether it is a business or a hobby
The rules for how you report income and expenses will depend on whether your income activity is actually a hobby or a business. There are nine factors to consider when determining the difference, including whether you make a profit, how often you engage in the hobby for sport or recreation, etc. These are the full 9 factors to consider.
2. Allow hobby deductions
While there are some limitations, you should be able to deduct some ordinary and necessary hobby expenses. An ordinary expense refers to expenses that are expected for that activity, while a necessary expense is one that is appropriate for the activity, but may not be as common.
3. Limits on hobby expenses
Generally, you can only deduct hobby expenses up to the amount of hobby income. If your expenses are more than your income, that is considered a loss from the activity. You cannot deduct the loss from your other income.
4. How to deduct hobby expenses
It is necessary to itemize any deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into one of three types of deductions, with special rules applying to each. See Publication 535, Section A for the rules about how you claim them for each.
5. Use IRS Free File
While hobby rules can be complex, IRS Free File can make filing your tax return easier and available free until October 15th. If your hobby makes %58,000 or less, you can use this brand-name tax software. If you earn more, you can use Free Fire Fillable Forms, an electronic version of IRS paper forms.