Before any of the architecture matters, the activity has to clear a threshold question: is it a business at all? The answer is not philosophical — it is financial, and it decides whether you are taxed on profit or on gross receipts.
If your activity is a hobby, you must report all of its income, but you cannot deduct any of its expenses. The Tax Cuts and Jobs Act of 2017 suspended the miscellaneous itemized deductions subject to the 2% of Adjusted Gross Income (AGI) floor — the category that once absorbed hobby expenses — and One Big Beautiful Bill Act (Public Law 119-21) (OBBBA) made that repeal permanent. A hobby is now taxed on its gross receipts, with no offset for materials, supplies, or equipment. If the activity is a business, you deduct every ordinary and necessary expense, even when those expenses exceed income, potentially creating a net operating loss that offsets other income.
The IRS does not leave the classification to guesswork. It weighs a set of factors — no single one decides:
Do you keep books, receipts, and a written plan, maintain a separate bank account, and adjust methods to improve profitability?
Do you understand the commercial side — pricing, marketing, scaling — and not merely the craft?
Consistent, focused work suggests a business; sporadic effort suggests a hobby.
A history of turning ventures profitable counts in your favor.
The IRS presumes a business if you turned a profit in three of the last five years (two of the last seven for activities involving horses).
Relying on the activity to live points toward a business; a comfortable day job covering your expenses points the other way.
An activity pursued mainly for recreation invites the hobby label.
The cost of the wrong classification is not abstract. Sell $5,000 of handmade candles on Etsy with $2,000 of materials, $500 of shipping, $1,000 of marketing, and $1,500 of equipment depreciation, and a hobby ruling taxes the full $5,000 of receipts — you owe tax on $5,000 of income against $0 of real economic profit. As a business, you report the $5,000 on Schedule C, deduct the $5,000 of expenses, and owe nothing; had expenses been $6,000, the $1,000 loss could offset other income.
Report the income either way. The $20,000-or-200-transaction Form 1099-K threshold governs what the platform reports about you, not what you owe — all income belongs on your Form 1040 regardless of whether a form arrives. If you intend to be treated as a business, act like one: keep records, write a plan, separate your finances, and aim for genuine profitability. For the governing standard, see Treas. Reg. §1.183-2, “Activities Not Engaged in for Profit”.