Starting in 2026, the IRS will once again crack down on taxpayers attempting to deduct hobby losses. The IRS expects a clear profit motive before allowing expense deductions for side activities. Let’s explore the rules, tests, and planning strategies every U.S. taxpayer should know.
Why Hobby Losses Are Disallowed in 2026
The Tax Cuts and Jobs Act (TCJA) suspended many itemized deductions through 2025, including hobby expenses. With these provisions expiring, the IRS will once again enforce profit-motive rules beginning in 2026. This means you can no longer claim expenses against hobby income unless the activity qualifies as a business with intent to earn a profit.
The IRS Profit-Motive Tests
To determine whether your activity is a business or a hobby, the IRS applies a series of tests. While no single factor is decisive, the following are crucial:
- Profit history: Have you earned a profit in at least 3 of the last 5 years?
- Businesslike conduct: Do you maintain records, separate accounts, and professional practices?
- Time and effort: Do you dedicate significant time to the activity as if it were a real business?
- Dependence on income: Do you rely on the income for your livelihood?
- Expertise: Do you consult professionals or study your industry to improve profitability?
- Marketing efforts: Are you actively trying to sell goods or services for profit?
If your activity fails these tests, the IRS is likely to classify it as a hobby, disallowing deductions in 2026 and beyond.
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How Hobby Income Will Be Taxed
Income from hobbies must still be reported on your tax return as other income. However, starting in 2026, you cannot deduct related expenses, meaning the IRS will tax the full amount of your hobby earnings.
Example: If you earn $6,000 from woodworking in 2026 but spend $4,500 on supplies, you must still report the full $6,000 as taxable income. The $4,500 expense cannot be deducted unless you qualify as a business.
Strategies to Pass the Profit Test
- Register your activity as a business (LLC or sole proprietorship).
- Open separate bank accounts for your business transactions.
- Keep detailed records of income, expenses, and marketing.
- Advertise your services or products consistently.
- Show profitability at least 3 out of 5 years to strengthen your case.
Who Will Be Impacted Most?
The new enforcement in 2026 will affect side hustlers, artists, freelancers, and gig workers who mix personal enjoyment with occasional income. Without proper business treatment, they risk losing valuable deductions and increasing their tax liability.
Key Takeaways for U.S. Taxpayers
- Starting 2026, hobby expenses are not deductible.
- Only activities with a clear profit motive qualify for business deductions.
- Recordkeeping, advertising, and profitability are essential to passing the IRS test.
- Failing the test means all hobby income is fully taxable.
