Hobby Loss Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Hobby Loss, written in plain English, along with examples of how it is used.

What is Hobby Loss?

History and Meaning of Hobby Loss

Hobby Loss refers to a loss incurred in a not-for-profit activity that is generally undertaken for personal pleasure or recreation. The concept of Hobby Loss originated with the Internal Revenue Service in the United States in the early 20th century, as a way to regulate losses from hobby activities that could be mistakenly claimed as business losses to reduce tax liability.

The IRS has regulations to determine whether an activity is engaged in for profit or as a hobby. A hobby activity is not undertaken with a profit motive, and therefore any losses incurred are not deductible. This is different from a business activity, where the intention is to make a profit, and losses incurred in the early stages of the business can be deducted from the taxes paid.

Examples of Hobby Loss

1. A person who buys and races horses as a hobby cannot deduct their expenses related to training and racing the horses because the activity is not engaged in for profit.

2. A person who collects antique cars as a hobby cannot deduct expenses related to restoring the cars because the activity does not have a profit motive.

3. A person who writes and publishes books as a hobby cannot deduct expenses such as printing costs and marketing expenses because they are not engaged in the activity with the intention of earning income.

Legal Terms Similar to Hobby Loss

1. Business Loss: The loss incurred in a business activity that is engaged in with the intention of making a profit.

2. Non-Profit Loss: A loss incurred in an activity that is undertaken with a charitable or philanthropic purpose.

3. Casualty Loss: Losses incurred due to theft, destruction, or other unexpected events, such as natural disasters or accidents.