Hobby vs business: how are craft fair sellers taxed?

You love making items but also want to sell them. The hobby vs. business distinction feels fuzzy and you worry about filing incorrectly.

The IRS uses a set of guidelines to determine whether an activity is carried on for profit (a business) or for recreation (a hobby). While a common rule of thumb involves making a profit in three out of five consecutive years, the IRS actually considers a variety of factors to determine intent. If an activity is classified as a hobby, tax regulations often significantly restrict the ability to deduct expenses. Maintaining detailed financial records is one way vendors demonstrate a “profit motive.” For a definitive determination, vendors may want to review the IRS “Hobby Loss” rules or consult a tax advisor.

Keep detailed records, separate business finances, and track profitability. If you are unsure, consult a tax professional to classify your activity correctly. The more business-like your approach, the clearer the tax treatment becomes.

Can you make good money selling crafts?

Many sellers start as a hobby and grow into a real business. The difference is less about how much fun you have and more about whether you are actively trying to earn a profit and running things like a business.

• Track profit per event to show consistent intent to earn.
• Separate finances and keep inventory and expense records.
• Set goals and reinvest in the business over time.