Hobby income is a fantastic source of income. You get to do what you love doing for money! Who wouldn’t like that? If you love your day job too well that is two in one! When it comes to passive income, is hobby income passive or non-passive?
What is Non-Passive Income (Including a Hobby Income Example)
With hobby income, you get to build a business for something you do as a side gig outside of your day job. This is a great way to build a different source of income.
At Millionaire Mob, we are focused on building as many solid income streams as possible. I track this with Personal Capital to ensure that I know where my income is going. Once I receive hobby income, I pour that into my investment accounts.
We don’t want to spread ourselves too thin though. If you have too many different sources of income at once, you end of make $10 per month from each. I’d rather focus on two or three income streams and be excellent at them. Here we will evaluate an example of hobby income as passive or non-passive income?
What is Non-Passive Income?
Non-passive income is revenue that cannot be classified as passive income for tax purposes. Non-passive income would be defined as any work performed on a regular, substantial and continuous basis, which would include:
- Normal daily wages
- Monthly salary
- Payment for tasks that you complete on a regular basis
In addition, non-passive income is defined as any income that you have had an active participation in generating the income.
You earn significant tax benefits by declaring wages as passive income, but how do you draw the line for things like hobby income? Before we get started on our example nonpassive or passive income, what defines hobby income?
What is hobby income?
Hobby income is a form of income that is generated from an activity, interest, enthusiasm or past time. A hobby is typically undertaken for pleasure or relaxation and is done during your own time. With hobby income, you are essentially not spending a majority of your time doing the activity. Hobby income is not a business.
Hobby Income Examples
Examples of hobby income continues to grow. Here are several examples of hobby income so you know what we are talking about:
- Coin collecting
- Baseball card collecting
- Craft making (hello, Etsy!), which includes woodworking, crocheting, knitting, knife making and so much more. Whatever is defined as a craft is fair game!
- Fantasy sports
- Video gaming
- Watching movies
- Lego building
- Kombucha brewing (this is a popular one these days!)
- 3D printing
- Computer programming
- Listening to music
- And many, many more….
I’m sure you have a hobby. There are plenty of other hobbies out there. Here is a list of hobbies for income. Do you have hobby income though? If you don’t have hobby income, you probably should! I’m a firm believer that you can really monetize anything thing these days, and why not?
It makes it so much more fun if you can also earn a little side hustle from it. This allows us to reinvest into a retirement portfolio or our dividend portfolio that will earn us additional cash flow!
Millionaire Mob Hobby Income Examples
What does Millionaire Mob love to do to earn hobby income? We’ve built a couple of forms of hobby income that makes me happy and ‘keeps the lights on’ if you will:
- Travel photography: Millionaire Mob loves to travel around the world. We bring our camera with us, so we can capture the moment. We take photos of our travel experiences, so why not make a couple of bucks from it. If you love travel photography, check out how to make money from travel photography. Most (if not all) of our photos on Millionaire Mob are from our travel experiences.
- Kindle eBook: Again, Millionaire Mob loves to travel. Why not document it? Love investing? We created an eBook titled Dividend Investing Your Way to Financial Freedom.
To pair that all together, we like to travel for free by using credit card churning and manufactured spending. This enables us to keep our costs low to travel, but yet document some of the best experiences in the world.
If you don’t know manufactured spending, we have an introduction to credit card manufactured spending to help you get started.
Is hobby income non-passive income?
Hobby income is non-passive income if you have reached a business level status. Has your hobby become so large that you earn more money than a small business? If you are spending your entire day working on it, hobby income is not passive income. Regardless if hobby income is passive or non-passive, hobby income is taxable no matter what.
Here are some considerations that would mean your hobby income is non-passive or business income:
- You make a profit in a number of years
- Your hobby income is expected to make a profit in the future from assets used to participate in the activity
- Do you have losses? Are these losses beyond your control or were they mainly start-up costs?
- Do you depend on income from the activity?
- The time and effort put into the activity indicates that you intend to make a profit from conducting the hobby. Key point here!
These are several key points to consider. If your hobby is classified as business income then you it is surely non-passive. One could argue that business income can still be passive income! I somewhat agree… If you have own a large business but spend little to no time on it, you also have significant responsibility. With other forms of passive income, such as selling travel photography, I don’t really have significant responsibility with that income. The hobby income just happens.
What about the case for hobby income as passive income? What would make hobby income passive?
Is hobby income passive income?
Hobby income has a number of points that would clarify it as passive income. The first thing that comes to mind is the Internal Revenue Service. How does the IRS classify hobby income? The IRS has given us five basic tax tips to consider when determining tax implications for hobby income:
- Is it a business or a hobby?: A key feature of a business is that you operate it to make a profit. You usually do a hobby to not make a profit. Consider all factors to make a determination on what classifies a business:
- Do you have employees working for you?
- Do you have formal organizational structure?
- Are there automated tools to your process and a legal structure?
- Allowable hobby deductions: Within certain limits, you can deduct ordinary and necessary hobby expenses. An ordinary activity is one that is a common and accepted for the activity.
- Limits on hobby expenses: Generally speaking, you can only deduct your hobby expense up to the amount of hobby income. Sadly, you cannot deduct your hobby losses if you expenses exceed your income.
- How to deduct hobby expenses: Generally speaking, you can only deduct your hobby expense up to the amount of hobby income. Sadly, you cannot deduct your hobby losses if you expenses exceed your income.
- Use IRS Free File: Yeah… No thanks. I know a few other services that might be a little more intuitive. It is free though!
The IRS clearly defines a number of these points broad. They leave it up to you to determine so choose wisely. In my opinion, the way the language reads hobby income is just that until multiple people get involved.
Examples of Hobby Expenses
Hobby expenses are a critical component to your taxes. Examples of hobby expenses include:
- Costs to acquire materials in your hobby (i.e., paint for painting or cloth for a product, etc.)
- Any expenses related to your technology and work product, which include computers, software, etc.
These examples of hobby expenses are deductible when you think about filing your hobby income taxes. Winning a money giveaway would not be an example of hobby income.
So…. Is Hobby Income Passive or Non-Passive?
The answer is… maybe? Nooooooo. I believe hobby income is purely passive income. However, it still depends on how you are conducting your hobby. Keep these tips in mind regarding nonpassive income and have your protocols in place that demonstrate you have no active or material participation in your hobby.
If you have scaled your hobby to the point where you have employees, a legal organizational chart, and more, then your hobby is no longer passive income. You have a full scaled enterprise and you are now a Chief Executive Officer.
Here is how we identify the difference between passive and nonpassive income.
Conclusion on Nonpassive and Passive Income
Regardless of tax considerations, never stop trying to find ways to build hobby income. It can be a great tool. You never know this might become your calling to do something big. We all have hidden talents out there. You just need to go find them.
Find out what you love to do before you are in retirement and try need things. Passive income is like finding ways to make money for doing nothing. It will pay you into perpetuity.
We’ve been using some of our favorite hobbies to generate different sources of income. It’s fun and keeps you happy. Happy side hustlin’! What do you think, is hobby income passive or non-passive? Please let us know in the comments below.
We’d love to hear from you! Looking for other ways to increase your income? Here are 23+ online jobs that require no investment.
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