U.S. Tax · Online sellers
Hobby vs business checklist for online sellers.
Run your Etsy, eBay or side-hustle activity through the factors the IRS lists, plus the profit-history presumption.
The IRS looks at nine factors and says no one factor alone is decisive. An activity is also presumed to be for profit if it made a profit in at least 3 of the last 5 tax years.
Hobby income is still taxable. Being a hobby changes what you can deduct against it, not whether you report it.
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Answer the questions and press Score the factors.
What the IRS says about hobbies and businesses
Publication 535 says that if you do not carry on a business or investment activity to make a profit, you cannot use a loss from it to offset other income, and that activities done as a hobby, or mainly for sport or recreation, are often not entered into for profit. In deciding, it lists these factors: whether you carry on the activity in a businesslike manner; whether the time and effort you put in show an intent to make it profitable; whether you depend on the income for your livelihood; whether losses are beyond your control or normal for the start-up phase; whether you change your methods to improve profitability; whether you or your advisors have the needed knowledge; whether you were successful in similar activities; whether it makes a profit in some years; and whether you can expect a future profit from asset appreciation.
The 3-of-5 presumption and Form 5213
An activity is presumed to be carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year (2 of the last 7 for breeding, training, showing or racing horses). You have a profit when gross income exceeds deductions. Filing Form 5213 postpones the determination so you have time to earn that profit record; it must be filed within 3 years after the due date of the return for the year you first carried on the activity, or within 60 days of an IRS written notice proposing to disallow deductions. The horse rule is not modelled in this tool.
What a hobby means for your return
The IRS fact sheet says income from an activity carried on with no intention of making a profit must be reported, and that you cannot use a loss from it to offset other income. Publication 535 (2022 revision) adds that miscellaneous itemized deductions can no longer be claimed, and that gross income from the activity may be figured by subtracting the cost of goods sold from gross receipts. Rules for the current year can differ, so read the current instructions for Schedule 1 and Schedule A or ask a tax professional.
Canada
The CRA says you need to report all sources of income and that, depending on the facts, you may be considered self-employed and carrying on a business. This tool scores the U.S. factors only. Canadian sellers should read the CRA material below, and see the GST/HST registration threshold checker if sales are growing.
Sources (read 18 October 2026): IRS Publication 535 (2022), Business Expenses, chapter 1 (the IRS has discontinued this publication); IRS Fact Sheet FS-2022-38, Know the difference between a hobby and a business; CRA, Top 10 tips for your platform economy tax obligations.
Frequently asked questions
How does the IRS decide if my Etsy shop is a hobby or a business?
It weighs facts and circumstances using a list of factors, including whether you run it in a businesslike way, depend on the income, change methods to improve profits, and have the needed expertise. No one factor decides it.
What is the 3-of-5-years rule?
An activity is presumed to be carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Horse breeding, training, showing or racing uses 2 of 7.
Do I pay tax on hobby income?
Yes. Income from an activity with no profit intention must still be reported. The difference is that you cannot use a loss from it to offset other income.
What is Form 5213?
An election to postpone the IRS determination of whether the profit presumption applies, giving you time to build the profit record. It is filed within 3 years after the due date of the return for the first year of the activity, or within 60 days of an IRS notice proposing to disallow deductions.
Does this checklist give me an official answer?
No. It is a tally of the factors the IRS lists. Only the IRS, or a court, decides on all the facts.
Informational guide — not tax advice
This tool tallies factors published by the IRS. It does not determine whether your activity is a business and it is not tax advice. Confirm with the IRS or a qualified tax professional.