Can You Deduct Hobby Expenses? What the IRS Says

You cannot claim a hobby expenses tax deduction on your 2026 federal return. Income from a hobby is fully taxable, but the costs you incur to earn it — supplies, equipment, entry fees, shipping, travel — cannot be subtracted from that income. If you sell $5,000 of handmade pottery and spend $3,000 on clay and kiln fuel, you owe income tax on the full $5,000.

Why the Deduction Is Gone

Hobby expenses used to be a miscellaneous itemized deduction. The Tax Cuts and Jobs Act of 2017 eliminated that entire category of deductions starting in 2018, and hobby costs went with it. The suspension had been scheduled to expire after 2025, which would have restored some form of hobby deduction for 2026. It didn’t. The One Big Beautiful Bill Act extended the key TCJA individual provisions, and the IRS has issued 2026 guidance reflecting those extensions.¹ For 2026 returns, hobby expenses remain non-deductible.

A potter running the same operation as a business would report the $5,000 in income and $3,000 in expenses on Schedule C and pay tax on the $2,000 net profit. That classification difference is worth real money, which is why the IRS pays close attention to the line between the two.

What You Owe on Hobby Income

Report all hobby income on Schedule 1 (Form 1040), Part I, on the line for other income.² Include every dollar: sales, prize money, barter value, tips from a monetized blog. The gross amount flows into your adjusted gross income and is taxed at your ordinary income rate, which ranges from 10% to 37% for 2026.¹

Do not put hobby income on Schedule C. That form is for business income and implies you are claiming business deductions you are not entitled to. Keep records of everything you receive whether or not you get a 1099-K or 1099-NEC. Payment platforms and marketplaces issue those forms only when transactions cross certain thresholds; the reporting obligation is yours regardless.

One narrow advantage: hobby income is not subject to self-employment tax. A business owner pays 15.3% on net earnings from self-employment (12.4% Social Security plus 2.9% Medicare). A hobbyist doesn’t.³ For anyone with meaningful expenses, that saving rarely offsets the loss of deductions. On $10,000 of gross receipts with $7,000 of costs, a business pays self-employment tax on the $3,000 profit; the hobbyist pays income tax on the whole $10,000.

Could Your Activity Qualify as a Business Instead?

If you are genuinely trying to make money, your activity may be a business, and business classification restores your ability to deduct expenses on Schedule C. Section 183 of the Internal Revenue Code governs activities “not engaged in for profit,” and Treasury regulations set out nine factors the IRS weighs when deciding which side of the line you’re on.⁴ No single factor decides it.

How businesslike your operation is: separate bank account, real books, running things the way a profitable competitor would.
Your expertise, or that of advisors you consult and actually listen to.
The time and effort you put in, especially when the work isn’t obviously recreational.
Whether assets used in the activity are expected to appreciate.
Your track record turning similar ventures profitable.
The history of income and losses: chronic losses well beyond a normal startup period cut against you; losses that shrink over time help you.
The size of any occasional profits compared with the size of the losses and your investment.
Your other income sources. Losses that conveniently shelter a high salary draw attention.
The personal pleasure or recreation involved. Horse activities, photography, travel writing, and craft brewing get closer scrutiny.³

Fun doesn’t disqualify an activity. Plenty of profitable businesses are enjoyable. But when recreational appeal combines with years of losses and a taxpayer whose day job easily absorbs those losses, the IRS connects the dots quickly.

The Three-Out-of-Five Safe Harbor

Section 183(d) offers a shortcut. If your activity produced a net profit in at least three of the last five tax years (including the current year), it is presumed to be a business, and the IRS has to prove otherwise. For activities that primarily involve breeding, training, showing, or racing horses, the threshold is two profitable years out of seven.⁴ Missing the threshold doesn’t automatically make your activity a hobby; it just means you can’t rely on the presumption and will need to defend your profit motive using the nine factors.⁵

Penalties for Getting It Wrong

Two mistakes carry real cost.

The first is failing to report hobby income. That can trigger the accuracy-related penalty under Section 6662, which adds 20% of the underpayment to your tax bill, with interest running from the original due date.⁶ Larger understatements can bring steeper penalties.

The more expensive mistake is claiming business deductions on Schedule C for an activity the IRS later reclassifies as a hobby. If that happens on audit, every deduction you claimed disappears. You owe back taxes on the deducted amounts, plus interest, plus potential penalties. The IRS tends to flag Schedule C filings that show losses year after year, particularly when the taxpayer has substantial other income and the activity is one people typically pursue for enjoyment. Six straight years of $8,000 losses from a woodworking “business” run alongside a comfortable salary is the pattern that draws questions.

What About the Old Pre-2018 Rules?

You may find older articles describing how to deduct hobby expenses up to the amount of hobby income on Schedule A, subject to a 2% AGI floor. Those rules governed returns through 2017 and no longer apply.⁵ Under current law extended through 2026, there is no equivalent deduction on Schedule A or anywhere else on the return. If you want to deduct your costs, the only path is to qualify as a business.

1
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
2
Internal Revenue Service. 2025 Schedule 1 (Form 1040) – Additional Income and Adjustments to Income
3
Internal Revenue Service. Know the Difference Between a Hobby and a Business
4
Office of the Law Revision Counsel. 26 USC 183 – Activities Not Engaged in for Profit
5
Internal Revenue Service. Is Your Hobby a For-Profit Endeavor?
6
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments