Hobbies are fun. They can also cost money. Sometimes they can make money. If you have an expensive hobby, can you deduct any of your expenses? The short answer is maybe.
For tax purposes, a hobby is an activity you engage in primarily for a purpose other than to make a profit. Classic examples of hobbies are fun activities such as making arts and crafts, collecting things like coins and stamps, writing, and photography. Even if you occasionally make money doing such an activity, it is a hobby if your prime motivation is having fun, not earning a profit.
Because hobbies are not businesses, hobbyists cannot take the tax deductions to which businesspeople are entitled. Instead, hobbyists can deduct their hobby-related expenses only from the income the hobby generates. If you have no income from the hobby, you get no deduction. And you can’t carry over the deductions to use in future years when you earn income—you lose them forever.
Example: Charles collects antiques. This year, he spent $10,000 buying antiques and earned no income from the activity. The IRS determines that this activity is a hobby. As a result, his $10,000 in expenses can be deducted only from income he earned from his hobby. Because he earned no money from antique collecting during the year, he can’t deduct any of these expenses this year—and he can’t carry over the deduction to any future years.
Even if you have income from your hobby, you must deduct your expenses in a way that is less advantageous (and more complicated) than regular business deductions. Hobby expenses are deductible only as a Miscellaneous Itemized Deduction on IRS Schedule A (the form that you file with your Form 1040 to claim itemized deductions). This means that you can deduct your hobby expenses only if you itemize your deductions instead of taking the standard deduction. You can itemize deductions only if your total deductions are greater than the standard deduction. If you do itemize, your hobby expenses can be used to offset your hobby income—but only to the extent that your expenses plus your other miscellaneous itemized deductions exceed 2% of your adjusted gross income (your total income minus business expenses and a few other expenses).
Example: Assume that Charles, a single taxpayer, earned $5,000 from his antique collecting hobby this year and had $10,000 in expenses. He could deduct $5,000 of these expenses as an itemized deduction—the amount equal to his antique collecting income. However, Charles can only deduct those expenses that, together with his other miscellaneous itemized deductions, exceed 2% of Charles’s adjusted gross income (AGI) for the year. If Charles’s AGI was $100,000 and he had no other miscellaneous itemized deductions, he could not deduct the first $2,000 in expenses (2% × $100,000 = $2,000). So Charles can deduct only $3,000 of his antique collecting expenses on his Schedule A.
If you have a hobby that earns money, be sure to keep good records of your hobby income and expenses.