The short version
The hobby loss rules create an uncomfortable asymmetry: income or gain from your collecting activity can be taxable, while the expenses you thought would offset it may be limited or suspended.
That matters for collectors who are halfway between fun and business. If you sell cards, watches, comics, coins, or art and report everything as a business, the IRS can ask whether you really had a profit objective. If the answer is no, Section 183 can shut down the expense side.
This article is about expenses. It does not erase basis. Your cost in an item, capital improvements, inventory treatment, and selling-cost treatment are separate questions, and the basis article in this series handles those records directly.
What the law actually says (primary authority first)
The income side starts with Internal Revenue Code Section 61, which says gross income includes income from whatever source derived, including gains from dealings in property. In plain English, the IRS does not ignore a collectible sale just because the activity feels personal.
Then Section 183 limits deductions for an activity not engaged in for profit. Section 183(a) says that if an individual or S corporation carries on an activity without a profit objective, no deduction attributable to that activity is allowed except as Section 183 permits.
Section 183(b) has two buckets. First, deductions that are allowable regardless of profit motive can still be considered. Second, expenses that would be deductible only if the activity were for profit are limited to the activity’s gross income after the first bucket. The statute does not let a hobby create a tax loss that offsets wages, portfolio income, or unrelated business income.
The current deduction problem is even harsher. Many older tax summaries refer to Section 67(g), the TCJA-era suspension of miscellaneous itemized deductions. Current law now places that rule in Section 67(h), former Section 67(g), and the current text says no miscellaneous itemized deduction is allowed for any taxable year beginning after December 31, 2017. A 2025 amendment removed the old January 1, 2026 sunset language. So for current-year planning, do not assume the hobby-expense deduction came back after 2025.
Finally, Treasury Regulation Section 1.183-2 explains how the IRS decides whether an activity is for profit. The regulation uses objective facts, not just what the taxpayer says. It also says no single factor controls, and a reasonable expectation of profit is not required. What matters is whether the facts show an objective of making a profit.
How it works in practice
Assume a collector buys and sells graded cards all year. He opens a marketplace account, receives payments, pays for grading, attends shows, stores inventory in a spare room, and reports the activity on Schedule C with a net loss.
If the facts show a real trade or business, Section 162 may allow ordinary and necessary business expenses. That is the dealer path, and it comes with trade-offs: business records, inventory, possible self-employment tax, and a different capital-asset analysis.
If the facts show an investment activity rather than a business, Section 212 is the usual production-of-income reference point, but current Section 67(h) can still suspend many miscellaneous itemized deductions. That investor path is not the same as a Schedule C business.
If the facts show a hobby, Section 183 becomes the limiter. The income side still has to be reported under the normal rules. A 2025 Schedule 1 even has a separate line for “Activity not engaged in for profit income.” But the expense side may not reduce the income at all under current Section 67(h), except for deductions allowable without regard to profit motive.
Here is the practical problem. A collector may say, “I spent more than I made, so I have a loss.” The tax return may say something different. The IRS may tax the sale or activity income, deny the Schedule C loss, and leave only a narrower basis or selling-cost analysis for the specific property sold.
Section 183(d) gives one useful presumption: if gross income from the activity exceeds deductions in at least 3 of 5 consecutive taxable years, the activity is presumed to be for profit unless the IRS establishes otherwise. That helps, but it is not a permanent shield. Facts still matter, especially if the activity looks recreational and the records look casual.
The numbers
The regulation gives nine factors the IRS normally considers. Count them as a checklist, not a vote tally. The regulation says no one factor is determinative.
| # | 1.183-2 factor | What it means for a collector | Source |
|---|---|---|---|
| 1 | Manner of carrying on the activity | Separate books, complete records, pricing discipline, and changes made to improve profitability | Treas. Reg. 1.183-2(b)(1) |
| 2 | Expertise of the taxpayer or advisors | Market study, grading knowledge, auction mechanics, and advice actually followed | Treas. Reg. 1.183-2(b)(2) |
| 3 | Time and effort | Regular sourcing, listing, shipping, accounting, and customer work | Treas. Reg. 1.183-2(b)(3) |
| 4 | Expectation that assets may appreciate | A credible plan that appreciation can produce overall profit after carrying costs | Treas. Reg. 1.183-2(b)(4) |
| 5 | Success in other activities | A track record of turning similar activities profitable | Treas. Reg. 1.183-2(b)(5) |
| 6 | History of income or losses | Loss pattern, start-up stage, market reversal, theft, fire, or other explanation | Treas. Reg. 1.183-2(b)(6) |
| 7 | Amount of occasional profits | Whether profits are meaningful compared with losses and investment | Treas. Reg. 1.183-2(b)(7) |
| 8 | Financial status | Other income sources and whether losses create tax benefits | Treas. Reg. 1.183-2(b)(8) |
| 9 | Personal pleasure or recreation | Whether personal enjoyment explains the activity better than profit | Treas. Reg. 1.183-2(b)(9) |
For a collectibles seller, the first factor often carries the most practical weight. If you want business treatment, the activity should look like a business before the IRS asks: separate accounts, inventory records, purchase dates, sale dates, platform statements, grading invoices, shipping records, and a written plan for profit.
What this means for you
- Do not use Schedule C just because a marketplace sent a form. The IRS instructions for Schedule C say a sporadic activity, not-for-profit activity, or hobby does not qualify as a business.
- Separate basis from expenses. The price you paid for the item is not the same thing as show travel, storage, research subscriptions, or general collecting costs.
- Document profit motive while the activity is happening. Rebuilding intent after an audit starts is much harder than keeping books, testing pricing, and changing methods when the numbers do not work.
- Watch the current Section 67(h) rule. The old 2018 to 2025 framing is stale for 2026 planning because the current Code no longer has the January 1, 2026 sunset phrase.
- Treat the 3-of-5 rule as helpful, not magic. A profitable record is strong evidence, but the IRS can still look at objective facts.
The hobby loss rules are not a punishment for enjoying what you collect. They are a boundary between personal activity, investment activity, and a real business. The tax cost comes from standing on the wrong side of that boundary while keeping records that do not support the side you claimed.
Related reading
- Collectibles and the 28% Tax Rate: Why Coins, Cards, and Art Are Not Taxed Like Stocks.
- Hobby, Investor, or Dealer? The Classification That Changes Your Whole Tax Bill (Collectibles Tax Notes, forthcoming).
- Turning a Collection Into a Business: Schedule C, Self-Employment Tax, and the 28% Trade-Off (Collectibles Tax Notes, forthcoming).
The primary law cited above is linked inline: IRC Section 61, IRC Section 183, IRC Section 67, Treas. Reg. Section 1.183-2, IRC Section 162, and IRC Section 212.
How Sheepdog Tax can help
I am Noah Green, a CPA and Certified Fraud Examiner, and Sheepdog Tax is a veteran-owned practice. I help collectors and resellers review whether their activity looks like a hobby, an investment activity, or a business before they file or respond to an IRS question. If you sell collectibles and are not sure which side of the hobby-versus-business line you are on, I can review the records, reporting position, and expense treatment. To ask for a hobby-versus-business review of your collecting activity, reach me at noah@sheepdogtax.com.
Sources (primary authority first, then IRS forms)
- Internal Revenue Code Section 61(a) (gross income includes income from whatever source derived and gains from dealings in property). https://www.law.cornell.edu/uscode/text/26/61
- Internal Revenue Code Section 183 (activities not engaged in for profit, deduction limitation, 3-of-5 presumption). https://www.law.cornell.edu/uscode/text/26/183
- Internal Revenue Code Section 67(h), former Section 67(g) (suspension of miscellaneous itemized deductions for taxable years beginning after 2017; 2025 amendment notes). https://www.law.cornell.edu/uscode/text/26/67
- Treasury Regulation Section 1.183-2 (objective profit-motive test and nine factors). https://www.ecfr.gov/current/title-26/chapter-I/subchapter-A/part-1/subject-group-ECFRcc67ec453a5e514/section-1.183-2
- Internal Revenue Code Section 162(a) (ordinary and necessary expenses paid or incurred in carrying on a trade or business). https://www.law.cornell.edu/uscode/text/26/162
- Internal Revenue Code Section 212 (expenses for production or collection of income and management of income-producing property). https://www.law.cornell.edu/uscode/text/26/212
- IRS, 2025 Schedule 1 (Form 1040), line 8j, “Activity not engaged in for profit income.” https://www.irs.gov/pub/irs-pdf/f1040s1.pdf
- IRS, 2025 Instructions for Schedule C (Form 1040), explaining that a hobby or not-for-profit activity does not qualify as a business and points nonbusiness income to Schedule 1, line 8j. https://www.irs.gov/pub/irs-pdf/i1040sc.pdf
Prepared by Noah Green, CPA, CFE.