Taxable Income Definition

Many people have a hard time with the taxable income definition. To define taxable income, you first have to start gross income. Under Section 61 of the Internal Revenue Code, the gross income tax definition is “ALL income from whatever source derived” (I added that emphasis there). There are, of course, certain items specifically excluded, but the default assumption for the gross income tax definition is that any income would be part of your taxable income definition.

That can have all kinds of tax implications. That taxable income definition means if you find $10 on the ground, it should be included in your gross income. That taxable income definition means if someone gives you a wrench for repairing their septic tank, its value should be included in your gross income. That taxable income definition means if lose a $20 bet that your friend won’t eat an entire jar of mayonnaise and you never pay up, that’s included in your gross income.

Virtually any time you get something you didn’t pay for (yes, that includes cancellation of debt), that’s included in your taxable income.

Remember back when it was cool to watch Oprah (before the OWN network fiasco) and she’d give brand new cars to everyone in the audience? Yep, that’s part of their gross income for income tax.


I’ll give it to you free, but the IRS will want their $45,000.

Have you ever hoped that HGTV would show up and build you a new backyard? Then I hope you have enough money to cover the taxes on the value, because when you define taxable income, that gets lumped in, too.

That means if you’re taking only your W-2 wages and tossing it onto your 1040, you’re probably doing it wrong.

Now, if we’re talking practicalities here, while the IRS will define taxable income just like I did above, they have no way of knowing if you found $10 on the ground, or if you welched on a bet. And chances are they’ll never call you on your bluff. But technically you should have thrown it all into line 21 of your 1040.

On the other hand, if you do win a vacation to Las Vegas from The Douche and don’t cough up your taxes, the IRS will know. They always know.


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Photo by Paul Albert

Note that this is not tax advice, and that you should contact your tax professional for any sort of tax decisions