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.