What does the IRS tax? Just about everything.
The Internal Revenue Code defines taxable income as gross income minus deductions. And gross income, federal law says, “means all income from whatever source derived.”
That’s a lot of territory, covering not only earned income like wages but also unearned income from investments. If you operate on a cash-free basis, the value of items you receive as a barter exchange is taxable, too. So are gambling jackpots and prize winnings.
And the IRS doesn’t care one bit how you get your money, specifically saying, “Income from illegal activities … must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.” Al Capone learned that hard lesson.