Found Money? Would It Be Taxed?
March 15, 2014 : Kevin Martin – The Tax Institute
Editor’s Note: What happens when you find money? Unfortunately, the IRS will ask a lot of questions, as indicated in the real-life stories below.
The idea of striking it rich has allured people throughout history: The pirates who plundered across the high seas, the frontiersman who trekked to Sutter’s Mill, and brave New York tourists searching for Curly’s Gold all sought to gain treasure and find money.
Recently, somewhere in Northern California, a couple actually lived the dream of finding money. While walking with their dog aside Saddle Ridge, they found several metal cans buried in the ground. The cans held more than 1,400 gold coins from the 19th Century — an estimated worth of around $10 million.
What people do not dream about, however, are the tax consequences associated with such a find. Just like with almost any type of money received during the year, it is taxable. As you might imagine, a haul this large can have a profound effect on your tax liability. Most of us are not in the habit of increasing our income by millions of dollars from year to year.
The idea that found property is taxable to the person who finds it at its fair market value is fairly well-established in law. In another famous instance, a couple in Ohio purchased a piano at an auction for $15 in 1957. In 1964, well after they purchased the piano, they found more than $4,000 inside. The court stated that the money found in the piano was taxable as ordinary income in the year it was found (1964). Since this time, this ruling has been key in establishing the tax principles of found property, and the IRS has been singing this tune ever since.
If you find yourself in this situation, there are a couple of ways in which you can decrease your taxes. It appears that the actual couple in this case will be using one of the more common potential tax decrease methods by donating some of their hoard to charity. Charitable contributions of cash or property are both allowed. However, in order to offset the tax the charitable contribution would have to occur in the same year you found the treasure.
If you find treasure buried under United States soil, you will also typically need to pay state taxes. California, for instance, has a top income tax rate of 13.3%. These taxes are in addition to the federal taxes, which for individuals can top out as high as a rate of 39.6%. In other words, it is possible that the couple in this case could be paying over half of this treasure back to the government. The couple can take a deduction on their federal return for any state income taxes paid, but the tax bill will remain very high.