If you own a business or investment that loses money on paper, whether you can actually deduct that loss against your other income depends on one thing: whether you "materially participate." Get it right and the loss is fully deductible. Get it wrong and the loss is "passive," locked up until you have passive income to offset.
Active vs. passive, in plain terms
If you're genuinely involved in running the activity, your losses are active and can offset wages, business income, and investment income. If you're a hands-off investor, the losses are passive and just sit there carrying forward. The difference can be worth thousands in a single year.
How you prove you're involved
There are seven different ways to qualify, but the one most people use is simple: spend more than 500 hours a year on the activity. Another common one: put in more than 100 hours and more than anyone else involved.
A couple of things people miss
Time you spend just reviewing statements as an investor doesn't count. But your spouse's hours do count toward yours, which is an easy win people overlook.
The bottom line
Material participation is won or lost on documentation. Know which test you're aiming for and keep the records to back it up. A Breadify membership sets up the tracking so your losses hold up.