Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

YARR! The IRS is After Me Booty – Is it income?

Growing up we used run around pretending that we were pirates finding buried treasure while sailing the dangerous seas. Nineteen years later as new tax interns, we found that pirates have to pay taxes just like everyone else. The tax code identifies income for tax purposes as income from all sources unless it is specifically excluded by the tax code. What about treasure? In Regulation 1.61-14 treasure troves are specifically listed as taxable income. Also, included in the regulation is any income that is obtained through illegal activities. It’s a pirate’s worst nightmare.

So, what items are specifically excluded? It is a fairly short list, but here are some of the more common items:

  • Interest from municipal bonds
  • Life insurance proceeds
  • Damages for personal physical injuries or sickness
  • Certain education savings plans
  • Combat zone compensation for military personnel

While these aren’t all of the items, you get the idea. Anything that could be considered income is probably subject to income tax. So, if you are a pirate or really anyone searching for treasure or you found money just lying around, know that it is more than likely taxable and that the IRS may come for your new found booty and tax it at rates as high as 39.6%. If you are unsure what to do, talk with your tax accountant and he or she can help.

We’re glad that as young boys someone didn’t tell us about income taxes, because piracy would not have been as exciting. We may have spent our time figuring out how to get into the municipal bond business.

By Robert Gilbert and Richard Christensen