Is it based on how much I earn? if so, can I re-invest all of the income back into the hobby and still call it a hobby?
Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.
In order to make this determination, taxpayers should consider the following factors:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the taxpayer depend on income from the activity?
- If there are losses, are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?
- Has the taxpayer changed methods of operation to improve profitability?
- Does the taxpayer or his/her advisors have the knowledge needed to carry on the activity as a successful business?
- Has the taxpayer made a profit in similar activities in the past?
- Does the activity make a profit in some years?
- Can the taxpayer expect to make a profit in the future from the appreciation of assets used in the activity?
The IRS presumes that an activity is carried on for profit if it makes a profit during at least three of the last five tax years, including the current year — at least two of the last seven years for activities that consist primarily of breeding, showing, training or racing horses.
From the IRS document FS-2007-18. The entire text can be found here: https://www.irs.gov/pub/irs-news/fs-07-18.pdf
From a tax/legal perspective, any income is taxable no matter how derived. On the other hand, if you're asking, "When has my hobby crossed over from being something that I do on the side to something I should consider doing full-time?" Different set of answers.
Firstly, do you want to place that burden on your hobby? If you're doing it purely for fun, do you want to "marry your mistress"? Once you start depending on it for income, the money you earn is no longer fun-money and must now be used to pay legitimate expenses, taxes and other commitments.
Secondly, will it support you or will you need other side projects? Consider your total income package now, including whatever you make from your hobby. How much would change if you switched your commitments and, perhaps, lost some of that revenue?
Lastly, if you started your hobby to be a break from the routine, what will now break you from the routine of your now ex-hobby?
All that said, if you're genuinely pleased by the income and overall profitability of the hobby, excited by the opportunities available and see a engaging and stimulating new career ahead of you then go for it.