DEFINITION of 'Hobby Loss'

A non-deductible loss incurred as a result of doing an activity for personal pleasure instead of for profit. A taxpayer cannot deduct the hobby loss as a business loss. A "hobby loss rule" is used to determine whether an activity is a hobby or a business.

BREAKING DOWN 'Hobby Loss'

The "hobby loss rule" states that if an activity is profitable in three years out of five then it can be treated as a business in the one or two year(s) that a loss was realized.

For example, if a man builds and sells birdhouses as a hobby, but only makes a profit one year out of the last five, then the losses are considered a hobby loss. The law does not prohibit taxpayers from making deductions on such activities if they are prepared to argue that the losses were created while attempting to make profit.

RELATED TERMS
  1. Profit Motive

    The intent to achieve monetary gain in a transaction or material ...
  2. Scripophily

    The hobby of collecting antique bonds, stocks and other financial ...
  3. Hazardous Activity

    If one of your hobbies falls under an insurance company’s definition ...
  4. Short-Term Loss

    A capital loss realized on the sale or exchange of a capital ...
  5. Casualty And Theft Losses

    Deductible losses stemming from the loss or destruction of the ...
  6. Ordinary Loss

    Any loss incurred by a taxpayer that is not considered a capital ...
Related Articles
  1. Personal Finance

    Six Most Popular Hobbies You Can Do For Free

    Does your budget not allow you to have expensive hobbies? Here are six great ideas for occupying your free time without spending money.
  2. Personal Finance

    5 Expensive Hobbies

    Not every hobby requires you to dig deep into your pockets, but some pursuits are far more expensive than others. Here are five hobbies that can cost a lot.
  3. Managing Wealth

    Essential Tips on Making Your Hobby Your Career

    Here are some ways to turn what you love to do for fun into your job.
  4. Taxes

    Capital Losses and Tax

    Capital losses are never fun to incur, but they can reduce your taxable income. Knowing the rules for capital losses can help you maximize your deductions and make better choices about when to ...
  5. Managing Wealth

    Capital Losses and Tax

    When an investment sells for less than its purchase price, the difference is a capital loss.
  6. Insurance

    Deducting Disaster: Casualty And Theft Losses

    If you've been a victim, your losses may be deductible. Find out how.
  7. Taxes

    6 Tax Deductions That Might Get You Audited

    The IRS only audits about 2% of the tax returns it receives, so if you can avoid certain red flags, you should be able to avoid an audit.
  8. Retirement

    5 Tips on Trading During Your Retirement Years

    Having fun is key to being happy during retirement. Here are five tips on how to act responsibly for retirees who want to continue their trading hobby.
  9. Taxes

    Here's How to Deduct Your Stock Losses From Your Tax Bill

    Learn the proper procedure for deducting stock investing losses, and get some tips on how to strategically take losses to lower your income tax bill.
  10. Taxes

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
RELATED FAQS
  1. What do insurance companies qualify as hazardous activity?

    Learn about activities that insurance companies classify as hazardous, and the effects this has on individuals seeking insurance ... Read Answer >>
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center