Income from illegal activities is considered taxable income.
The IRS says illegal income, including income from dealing drugs, must be reported on your tax return.
You can report illegal income in one of two ways.
If you stole money, received a bribe, or were hired to kill someone, you would report the income on line 8 of Schedule 1 where it says, “Other income.”
But if you earned money from an illegal business, like a money laundering operation, you would report the income on Schedule C.
This way you can take deductions for wages, rent, and other expenses of your business.
There’s an exception for drug traffickers, however, as they only get a deduction for the cost of goods sold.
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