For tax purposes, a hobby is an activity you carry on without expecting to earn a profit.  If you do earn a profit, it is taxable income.  But losses from not-for profit activities cannot be used to offset other taxable income.  These not-for-profit activities also include investment activities, or tax shelters, that are mainly intended to produce tax losses to offset other taxable income of the investor.

Determining Whether an Activity is for Profit or Not-for-Profit

Whether a hobby or other activity is being carried on for a profit will depend on the circumstances. One factor alone is not necessarily decisive, therefore all the facts should be taken into consideration.  Some of the factors mentioned by the Internal Revenue Service (IRS) that contribute to determining that an activity is intended as a profitable venture as opposed to a not-for-profit hobby include the following:

• You carry on the activity in a “business-like manner”, put in time and effort to make the activity profitable, and adapt the operation to improve profitability.
• You depend on income from the activity for your livelihood.
• Losses are normal in the start-up phase of the type of activity you are engaged in, or the losses are due to circumstances beyond your control.
• You, or your advisors, have the knowledge required to turn the activity into a successful business.
• You have been successful in generating a profit from similar activities in the past.
• The activity does not consistently generate losses - in some years it has a profit.  (Another factor will be the relative amounts of the profits and losses.)
• You expect to be able to profit in the future from the appreciation of the assets you use in the activity.