Six surprising taxable items
If something of value changes hands, you can bet the IRS will consider a way to tax it. Here are six taxable items that might surprise you.
Unemployment compensation. The IRS confused many by making this compensation tax-free during the COVID-19 pandemic. Unemployment compensation income has since gone back to being taxable
If you collect unemployment, withhold taxes, or make estimated payments to cover the tax liability.
Some scholarships and financial aid. Scholarships and financial aid are top priorities for parents of college-bound children, but be careful—if part of the award your child receives goes toward anything except tuition, it might be taxable. This could include room, board, books, or aid received in exchange for work (e.g., tutoring or research).
When receiving an award, review the details to determine if any part of it is taxable. Remember to also review state rules. While most scholarships and aid are tax-free, no one needs a tax surprise.
Crowdfunding. A popular method to raise money is crowdfunding through websites. Whether or not the funds are taxable depends on your intent for the funds and what the giver receives in return. Generally, funds used for a business purpose are taxable, and funds raised to cover a life event are a gift and not taxable to the recipient.
Before using these tools, review the terms and conditions and request a tax review of your activities.
Cryptocurrency transactions. Cryptocurrencies like Bitcoin are considered property by the IRS. So, if you use cryptocurrency, you must keep track of its original cost and its value when you use it. This information is essential for a proper tax calculation of your gain or loss.
Using cryptocurrency for everyday financial transactions is not for the faint of heart because it involves extensive record-keeping.
Some additional surprises
Hidden treasure. In 1964, a married couple discovered $4,467 in a used piano they had purchased seven years prior for $15. After reporting this hidden treasure on their 1964 tax return, the couple filed an amended return that removed the $4,467 from their gross income and requested a refund. The couple filed a lawsuit against the IRS when the refund claim was denied. The Tax Court ruled that the hidden treasure should be reported as gross income on the couple’s 1964 tax return, the year when the hidden treasure was found.
The IRS considers many things, like hidden treasure, taxable even though they are not explicitly identified in the tax code.
Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings, including casino games, lottery tickets, and sports betting, are taxable. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records.
Know the winning threshold for when a casino or other payer must issue you a Form W-2G. But beware; the gambling facility and state requirements may lower the limit.
When in doubt, it’s a good idea to keep accurate records so the calculation of your tax liability is correct and you don’t have to pay more than what is necessary. Please contact our RRBB advisors if you have questions about your unique situation.
Get free tax planning and financial advice