2026 · side income
Hobby vs business: why it decides your tax
The same $5,000 of side income is taxed two very different ways depending on one classification. And the "hobby" side is the expensive one.
Every platform-and-state question eventually hits the same fork: is this a hobby or a business? It's not a label you pick for convenience, the IRS decides by whether you're genuinely trying to make a profit. And it changes the math more than the dollar amount does.
What changes with the classification
| Business (Schedule C) | Hobby | |
|---|---|---|
| Income taxable? | Yes | Yes |
| Deduct expenses? | Yes, fees, materials, mileage | No (since 2018) |
| Self-employment tax? | Yes, on net profit | No |
| Can claim a loss? | Yes, against other income | No |
The counter-intuitive part: a hobby often costs more tax on the same gross, because you pay on income while deducting nothing. If you're running it seriously, the business classification, with its deductions, is usually where you want to be, SE tax included.
How the IRS decides
No single test, but the factors point the same way: do you keep businesslike records, put in real time and effort, depend on the income, and have a history (or reasonable expectation) of profit? Consistent effort aimed at profit reads as a business; occasional sales for fun read as a hobby.
Selling your own used things
A separate case: offloading personal items you already owned. Sold at a loss, it's not taxable income and the loss isn't deductible. A platform may still send a 1099-K reporting the gross, which you reconcile on the return, the form reports, it doesn't tax.
Questions
Is my side income a hobby or a business?
The IRS looks at whether you run it to make a profit, businesslike records, effort, dependence on the income, and a history of profit all point to a business. A business reports on Schedule C and pays self-employment tax but can deduct expenses; a hobby reports income but, since 2018, cannot deduct hobby expenses.
Can I deduct expenses from hobby income?
No. Since the 2018 tax law, hobby expenses are not deductible, but hobby income is still fully taxable. That's the trap: a hobby is the worst of both worlds tax-wise, which is why the business classification, with its deductions, often matters more than people expect.
Does selling my used stuff count as income?
Selling personal items at a loss (a closet clean-out) isn't taxable income, and the loss isn't deductible either. Selling them at a gain can be. A 1099-K may still report the gross, so you reconcile it on the return, the form doesn't decide whether it's taxable.
Related
General information for 2026, not tax advice. Classification is fact-specific, a professional can confirm yours.