A Thickening Pot: Gross Income Taxation of Hobby Activities

Abstract

Two cases decided in late 2018 confirmed that taxpayers must pay federal income tax on their gross income from marijuana businesses, with zero allowed deductions, even if the businesses are legal under state law. A lesser-known effect of the Tax Cuts and Jobs Act of 2017 is that many taxpayers may be similarly taxed on their gross income from their activities not engaged in for profit, which are informally known as “hobby activities.” They are not limited to traditional fun hobbies and may range from coal mining to used-car sales to lawyering.

This gross income taxation of hobby activities could result in severe financial hardship for affected taxpayers, who by definition do not make much money from those activities.

Keywords: hobby activities, hobby losses, marijuana, miscellaneous itemized deductions, tax simplification