Hobby Loss

AAA

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.

INVESTOPEDIA EXPLAINS '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. Imputed Cost

    A cost that is incurred by virtue of using an asset instead of ...
  2. Profit Motive

    The intent to achieve monetary gain in a transaction or material ...
  3. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  4. Gambling Income

    Any income that is the result of games of chance or wagers on ...
  5. Realized Loss

    A loss is recognized when assets are sold for a price lower than ...
  6. Standard Deduction

    A base amount of income that is not subject to tax and that can ...
RELATED FAQS
  1. How can I make sure I get all my eligible deductions?

    Most tax preparation software does a good job. However, like any recipe, the end results are only as good as what goes into ... Read Full Answer >>
  2. What are some commonly missed deductions for business owners?

    If you own a business, you are eligible to deduct certain business-related expenses. These include deductions for the following: Home ... Read Full Answer >>
  3. What is the difference between comprehensive income and gross income?

    Comprehensive income and gross income are similar, but comprehensive income is a specific term used on a company's financial ... Read Full Answer >>
  4. What tax breaks are afforded to a qualifying widow?

    The tax breaks accorded to qualifying widows or widowers include being able to use a tax filing status that allows for a ... Read Full Answer >>
  5. How is income taxed on prorated salary?

    Since yearly income is viewed by the Internal Revenue Service (IRS) as the total amount of income a person has made over ... Read Full Answer >>
  6. How can I tell which of my business expenses count as write-offs?

    Any basic, reasonably necessary expenses incurred in running a business can be considered possible write-offs. Such expenses ... Read Full Answer >>
Related Articles
  1. Taxes

    Tax-Saving Advice For IRA Holders

    Be informed about benefits and deductions that may apply to you and avoid costly mistakes on your return.
  2. Savings

    Tax-Saving Tips For Canadian Taxpayers

    Find out how to get a bigger return.
  3. Taxes

    Tax Deductions For Rental Property Owners

    Besides creating ongoing income and capital appreciation, real estate provides deductions that can reduce the income tax on your profits.
  4. Taxes

    Vacation Home Or Income-Producing Investment?

    There is an alternative to letting your cottage sit empty all year, but turning a profit won't be easy.
  5. Taxes

    Are You Paying Too Much in Taxes?

    Overpaying taxes amounts to an interest-free loan to the government. Here are some ways to avoid that scenario.
  6. Taxes

    What's a Tax Shield?

    A tax shield is a deduction, credit or other means used to reduce the amount of taxes an individual or business owes to the government.
  7. Taxes

    What's an Indirect Tax?

    An indirect tax is levied on goods or services rather than on an individual or a company.
  8. Taxes

    An in Depth Look at How Inheritances Are Taxed

    The tax implications of an inheritance can be complex. Here's what beneficiaries need to know.
  9. Professionals

    How Financial Advisors Can Woo Wealthy Clients

    To woo wealthy clients, offer the resources they need and design a strategic website and marketing plan to bring those desired clients into your firm.
  10. Taxes

    5 Overlooked Tax Deductions for Small Businesses

    It's easy for small business owners to miss a few tax write-offs. Here's where to find them.

You May Also Like

Hot Definitions
  1. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
  2. Killer Bees

    An individual or firm that helps a company fend off a takeover attempt. A killer bee uses defensive strategies to keep an ...
  3. Sin Tax

    A state-sponsored tax that is added to products or services that are seen as vices, such as alcohol, tobacco and gambling. ...
  4. Grandfathered Activities

    Nonbank activities, some of which would normally not be permissible for bank holding companies and foreign banks in the United ...
  5. Touchline

    The highest price that a buyer of a particular security is willing to pay and the lowest price at which a seller is willing ...
  6. Himalayan Option

    An exotic equity option belonging to a class known as mountain range options. Himalayan options are based on a basket of ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!