Selling online: when a hobby becomes a business, and why the difference is the deductions
Profit from a hobby is taxed. Losses from a hobby are not deductible. The IRS decides which one you have with nine questions, and the answers are in your records.
Three people sell things online. One clears out a garage and sells old furniture for less than it cost. One makes jewellery on weekends and roughly breaks even. One resells sneakers and clears $15,000 a year. The tax code treats them differently, and the differences turn on intent and records rather than on the amounts.
Selling your own used goods
Personal items sold for less than they cost produce no taxable gain, and the loss is not deductible — it is personal. If a platform sends a 1099-K because sales passed $20,000 and 200 transactions, the amount is reported and then adjusted to zero on the return with the cost shown, so the form does not create tax that the sale did not.
An item sold for more than it cost — a collectible, a piece of equipment that appreciated — is a capital gain, taxed at the capital gains rates.
Hobby against business
Since the 2018 tax year, expenses of an activity classed as a hobby cannot be deducted at all. The income still goes on the return. A hobby that takes in $3,000 and spends $2,800 on materials is taxed on $3,000.
A business reports the same figures on Schedule C and is taxed on the $200 of profit — and if it makes a loss, the loss reduces other income. That is why the classification matters, and why the IRS has a test for it.
The nine factors
No single factor decides. The IRS looks at whether the activity is carried on in a businesslike way, with books and records; whether the time and effort suggest an intent to profit; whether the person depends on the income; whether losses are from circumstances beyond their control or from a start-up phase; whether methods change to improve profitability; the person's expertise; past success in similar activities; the history of profit and loss; and whether there is personal pleasure involved.
A separate bank account, a ledger, invoices, a price list and a record of what was tried and changed are evidence of intent. They are also the thing most weekend sellers do not have. The presumption of a business — profit in three of the last five years — is a safe harbour, not the test.
The reseller
The sneaker reseller clearing $15,000 is a business on every factor, whatever they call it. The cost of the goods sold comes off first; then platform fees, shipping, packaging and the miles to the post office. The profit is subject to the 15.3% self-employment tax plus income tax, and to quarterly estimated payments once the tax owed passes $1,000.
| Seller | Classification | Income | Expenses |
|---|---|---|---|
| Garage clear-out | Personal property | Not taxable if sold at a loss | Not deductible |
| Weekend jewellery | Hobby, unless the records say otherwise | Taxable in full | Not deductible |
| Sneaker reseller | Business | Profit taxable, plus SE tax | Deductible; losses offset other income |
Sources
- Hobby or business? Here's what to know about that side hustleInternal Revenue Service · checked Sep 24, 2026
- Form 1099-K FAQs: What to do if you receive a Form 1099-KInternal Revenue Service · checked Sep 24, 2026