IRS Warns Side Hustle Owners: Hobby Income Is Still Taxable
The IRS Has a Message for Side Hustle Owners
On June 2, 2026, the IRS issued Tax Tip 2026-45 reminding taxpayers that hobby income is taxable even when an activity is not operated as a business. The IRS emphasized that many people earn income from hobbies, side projects, online marketplaces, content creation, photography, crafts, consulting, and other activities, but that income remains taxable regardless of whether the activity qualifies as a business.
This reminder comes at an important time. More taxpayers than ever are earning income through online platforms, payment applications, digital marketplaces, and digital assets. Many assume that if an activity is considered a hobby, the income somehow becomes tax free.
That assumption is wrong.
Hobby income is taxable. The primary tax question is not whether income is taxable, but whether expenses are deductible.
Why the Distinction Matters
The IRS distinguishes between activities operated for profit and activities conducted primarily for recreation or personal enjoyment.
IRC Section 183 generally limits deductions attributable to activities that are not engaged in for profit. Treasury Regulation Section 1.183-2 explains that activities conducted primarily as a sport, hobby, or recreation generally do not qualify for deductions under IRC Sections 162 or 212. The determination is based on all facts and circumstances, with greater weight given to objective evidence than to a taxpayer's statements of intent.
Importantly, the IRS does not require a reasonable expectation of profit. Instead, the taxpayer must demonstrate an actual and honest objective of making a profit.
For a detailed discussion of the IRS hobby loss rules, see my article Hobby vs Business Tax Rules: How the IRS Determines Deductible Expenses .
What the IRS Said in the New Tax Tip
The IRS identified several questions taxpayers should ask when determining whether an activity is a hobby or a business. These questions closely mirror the factors found in Treasury Regulation Section 1.183-2. The IRS asks taxpayers to consider:
- Whether there is an intent to make a profit.
- The amount of profits generated.
- Whether assets may appreciate in value.
- Whether the taxpayer depends on the income.
- Whether losses are attributable to startup costs or circumstances beyond the taxpayer's control.
- Whether operations are adjusted to improve profitability.
- Whether complete and accurate books and records are maintained.
- Whether the taxpayer or advisers possess relevant expertise.
The IRS specifically noted that no single factor determines the outcome.
Hobby Income Is Still Taxable
One of the most important statements in the IRS Tax Tip is also one of the most commonly misunderstood.
Even if an activity is a hobby, the income remains taxable.
For example:
- A photographer who occasionally sells prints.
- A crafter selling products on Etsy.
- A collector selling items online.
- A social media creator earning advertising revenue.
- A gamer receiving sponsorship income.
- A hobbyist receiving cryptocurrency for services.
Each of these taxpayers may have taxable income even if the activity does not qualify as a trade or business.
The real issue becomes whether related expenses are deductible.
Forms 1099-K and 1099-DA Increase IRS Visibility
The IRS specifically reminded taxpayers that payment application transactions may generate Form 1099-K reporting and digital asset transactions may generate Form 1099-DA reporting. Those forms are generally provided to both the taxpayer and the IRS.
As a result, many side hustle activities that previously received little IRS attention now generate information reporting that can be matched against tax returns.
Taxpayers who receive Forms 1099-K or 1099-DA should carefully track the nature of the activity and maintain adequate supporting records.
The Tax Court Has Been Consistent for Decades
The IRS Tax Tip does not create new law. Rather, it reflects principles that the Tax Court has applied for decades.
Cases such as Engdahl, Keanini, Topping, Metz, Golanty, and Giles consistently demonstrate that taxpayers prevail when they operate in a businesslike manner and maintain evidence supporting a profit motive.
For a detailed discussion of these cases, see my article How to Win an IRS Hobby Loss Audit: Lessons From Tax Court Cases .
Good Records Matter More Than Ever
The IRS concluded its Tax Tip by reminding taxpayers that good recordkeeping is important regardless of whether an activity is a hobby or a business.
That observation is consistent with virtually every hobby loss case decided by the Tax Court.
Taxpayers should maintain:
- Separate business accounts.
- Books and accounting records.
- Receipts and invoices.
- Marketing records.
- Business plans.
- Profitability analyses.
- Documentation of operational changes.
For a practical guide to documentation, see my article How to Document Profit Motive for an IRS Hobby Loss Audit .
Final Thoughts
The IRS's latest guidance serves as a reminder that hobby income remains taxable regardless of whether an activity qualifies as a business. The real tax issue is often whether the taxpayer can establish a profit motive and deduct related expenses.
As IRS information reporting continues to expand through Forms 1099-K and 1099-DA, taxpayers operating side hustles, online businesses, creator businesses, and other income generating activities should pay close attention to their recordkeeping and business practices.
The taxpayers who successfully defend their deductions are usually the ones who planned for an audit long before one ever occurred.
