The answer is an unequivocal maybe. Current tax law allows you to deduct the expenses you spend on a hobby from the income that you make with that hobby. That means that if you are itemizing your taxes, you may be able to deduct expenses for postage, post cards, and sweepstakes newsletters from any wins that you receive.
To do this, however, you will need to keep very good records. For one thing, hobby expenses are only deductible from the income that is generated by that hobby. So if you have $500 worth of wins but $600 worth of expenses, you can still only deduct against your $500 worth of earnings. If you have "other income" other than your sweepstakes wins, you must be careful to distinguish the different sources.
Also, you need to keep good track of how you use the items you deduct. For example, if you buy $100 worth of stamps, you must be able to show that you spent all $100 on sweepstakes entries, and none on bills or letters to your Aunt Bertha.
Keeping your bills and receipts from all of your expenses is key to being able to show the IRS that your expenditures were legitimate.
You also need to be scrupulous in reporting only expenses that are used for your hobby alone. For example, a subscription to a sweepstakes service would probably be deductible, but your monthly bills for your internet would only qualify if you only use the net for sweepstakes entry.
Expenses that you deduct from your sweepstakes hobby are reported as miscellaneous itemized deductions on Schedule A, and are subject to the 2% limit.
The trick, however, is that if you are regularly making profit (i.e., wins), then the IRS may consider you to have a small business rather than a hobby. If you are spending eight hours a day at your computer entering, or spending all of your spare time filling out postcards for mail-in sweepstakes, then it is likely that you will need to file as if you have a home-based business. This will still allow you to deduct expenses, but it may also carry additional responsibilities.
How can you tell if you are engaged in a hobby or a business? The IRS has guidelines to help you tell the difference, including:
- Whether the time and effort you put into the activity indicate you intend to make it profitable
- Whether you change the way you work to make your hobby more profitable
- Whether you made a profit doing something similar in the past
- Whether the activity makes a profit in some years, and how much profit it makes
In short, your own specific circumstances have a huge impact on whether you can deduct your sweepstakes expenses or not. To make the right decisions for your circumstances, consult the IRS website and a professional tax consultant.