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Here is a link to IRS.gov.  On this page are some further links to information about hobby and business.

The 3 out of 5 year "rule" you are referring to, is that if in 3 years out of 5, the activity shows a profit, there is a presumption the activity is engaged in for profit. (for horses it is a 7 year window).  That would allow the activity to be treated as a business, and losses from that business would be allowed to offset other income, generate a net operating loss, etc. 


26 USC Section 183 is the governing law as to whether an activity is engaged in for profit.




**Disclaimer: Effort has been made to offer correct information; but due to the discussion forum limitations, the poster disclaims any legal responsibility for the accuracy of the poster's response**