State and federal agencies have developed clear definitions to differentiate between the occasional sale of art to an admirer and selling with the intent to turn a profit. The IRS says that determining whether a hobby is for profit or pleasure changes the kinds of deductions allowed on federal taxes. It also determines a seller's obligation to charge and collect sales tax, with rules, rates and exemptions subject to each state's own jurisdiction.

Selling as a Hobby

There is no need to apply for federal licensing or permits when selling art at a fair, garage sale or craft show. You do, however, have to report the income on your regular tax return. Event operators have their own rules for art exhibitors that may involve licensing and the collection of sales tax for the state where the sale occurs. Some states, such as Minnesota, don’t require filing if sales are under a set amount or considered isolated. When pricing your work, follow industry formulas that take into account not only the cost of materials and overhead, but the value of your time, as well.

Selling as a Business

Depending on how you register your business -- sole proprietor, corporation or partnership -- you may need to file for an Employee Identification Number, or EIN. The federal government requires no other paperwork when exhibiting, but states with sales taxes states require you register where you sell your work and charge a tax for in-state sales. Pricing your work involves researching market value as well as determining production costs. If selling in a gallery, the gallery takes a percentage of the sale, and it is industry standard practice to keep your own prices within range of those set by the gallery.

Taxes and Deductions

IRS Code Section 183 (Activities Not Engaged in for Profit) limits the deductions you can claim when your art is considered a hobby. This is sometimes referred to as the “hobby loss rule,” and means you itemize permitted expenses on a Schedule A (Form 1040). Businesses are allowed to file a Schedule C (Form 1040) to show a profit or loss income. On this form, you take as deductions “ordinary and necessary expenses” for the making and selling of your art. Most states, including Arizona, give businesses a tax break on the purchase of raw materials used in the creation of a finished product. Once a retailer has your exempt status on file, for example, you can purchase materials for your art work without having to pay sales tax on those items.

Making the Decision

The government considers an endeavor a business if you reasonably expect to make a profit. To qualify these expectations, it recommends asking yourself a few questions: Is selling your art for more than its production costs realistic? Do you intend to depend on this income? Do you have experience to substantiate this expectation, and are you willing to put in the time required to both make the art and run the business? Answering these questions help point the way when deciding whether or not to go from hobbyist to professional artist.