A hobby loss is an accounting term referring to expenses associated with a hobby that are deducted against tax obligations. Generally, a hobby loss is when a taxpayer has deductions that exceed the income received from a non-commercial activity. This type of deduction is not allowed for taxpayers claiming losses against their regular income, but they may deduct such costs from other income sources.
Hobbies can range from collecting coins to being an amateur photographer. Anything with the intention of pleasure that does not generate income or profits is considered to be a hobby. If the activity does generate income or profits, it then becomes a business and the associated expenses can be claimed as business-related deductions against income.
For example, let’s say someone makes jewelry as a hobby. They invest their own money buying materials and setting up a workspace where they can create jewelry. In this situation, they may be able to deduct the cost of materials, utilities, and workspace-related expenses associated with the hobby from other sources of income, but they may not be able to claim this as a deduction against their regular income. This is because the hobby-related expenses are not considered to be business-related deductions and therefore do not qualify for this type of deduction.
Conclusion
Understanding the concept of hobby loss is important for taxpayers so that they can accurately file their taxes. While hobby losses cannot be taken directly against regular income, they can be taken as deductions against other sources of income. Taxpayers should be aware of the distinction between hobby and business-related deductions so that they can accurately file their taxes and not be penalized by the IRS.