6 Surprising Taxable Items
If something of value changes hands, you can bet the IRS considers a way to tax it. Here are six taxable items that might surprise you:
- Surprise #1: Hidden treasure. In 1964, a married couple discovered $4,467 in a used piano they 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.
Tip: The IRS considers many things like hidden treasure to be taxable, even though they are not explicitly identified in the tax code.
- Surprise #2: 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).
Tip: When receiving an award, review the details to determine if any part of it is taxable. Don’t forget to review state rules as well. While most scholarships and aid are tax-free, no one needs a tax surprise.
- Surprise 3: Gambling winnings. Hooray! You hit the trifecta for the Kentucky Derby. But guess what? Technically, all gambling winnings are taxable, including casino games, lottery tickets and sports betting. Thankfully, the IRS allows you to deduct your gambling losses (to the extent of winnings) as an itemized deduction, so keep good records.
Tip: 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.
- Surprise 4: 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.
Tip: If you are collecting unemployment, either have taxes withheld or make estimated payments to cover the tax liability.
- Surprise 5: Crowdfunding. A popular method to raise money is crowdfunding through websites. Whether or not the funds are taxable depends on two things: 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.
Tip: Prior to using these tools, review the terms and conditions and ask for a tax review of what you are doing.
- Surprise 6: Cryptocurrency transactions. Cryptocurrencies like Bitcoin are considered property by the IRS. So if you use cryptocurrency, you must keep track of the original cost of the coin and its value when you use it. This information is needed so the tax on your gain or loss can be properly calculated.
Tip: Using cryptocurrency for everyday financial transactions is not for the faint of heart because of how much recordkeeping is involved.
When in doubt, it’s a good idea to keep accurate records so your tax liability can be correctly calculated and you don’t get stuck paying more than what’s required. Please call if you have any questions regarding your unique situation.
From Swift and Associates - Our Tax Preparation Partner
