It’s happened to many of us at some point—you may be walking along a street and look down. Lo and behold, there’s a $20 bill in your path. Or maybe it’s a silver bracelet. Either way, it’s found property. The tax ramifications of finding a $20 bill are negligible. The bracelet is a different story if it has any value. Now the Internal Revenue Service gets involved. Here’s the breakdown on how the IRS treats found property at tax time.
How found property became taxable income
In 1957, Ermenegildo and Mary Cesarini purchased a used piano, brought it home, and spent the next seven years enjoying its music. At some point in 1964, they opened it up and discovered $4,467 inside.
The Cesarinis argued to the IRS that the money wasn’t income, and so it should not be taxed as such. The IRS wasn’t swayed by the couple’s argument. The case went to federal court, and the IRS won. “Found” property and money has been considered taxable income ever since.
If you find cash
The IRS plainly states that taxpayers must report “all income from any source," even income earned in another country, unless it is explicitly exempt under the U.S. Tax Code. This covers a wide range of miscellaneous income, including gambling winnings. According to the Cesarini decision, money you find isn’t explicitly exempt.
Miscellaneous income is taxable as ordinary income. This means it’s not subject to any special tax rate even if it doesn’t seem “ordinary” in the normal sense.
Example: You earn $50,000 in a year in your job. You stumble across $10,000 buried in a tin can. Your annual income is now $60,000 before you take any deductions or credits you're entitled to.
You’ll pay income taxes on this overall income, less deductions and credits, according to whatever tax bracket you fall into.
Fair market value of property
Tangible property is income too. But just how much would the Cesarinis have had to report if they had found (rather than purchased) that piano, taking the cash tucked inside out of the equation?
They’d owe taxes on the fair market value of the piano at the time they came across it. The IRS defines fair market value as what a reasonable person would be expected to pay for an item in its current condition if neither the buyer nor seller were under any duress to make the exchange.
The fair market value rule does not depend on whether or not you sell the found item. The value of the item is taxable even if you simply keep and enjoy the property you found.
Document the discovery
Of course, when and if you do sell any property you find, you will create a tangible record of your bounty, so it’s usually a good idea to document the discovery just in case the IRS asks questions later. You should:
- Take pictures of the property to show the condition it was in when you found it.
- Keep detailed records of whom you sold it to and how much you received for it.
- Give the buyer a written receipt and keep bank records if you deposit the proceeds.
Then be sure to include the sum paid for the item as income on your tax return. The good news is that you’re only taxed on it once. If you claim its value in the year you find it, then you wait a year to sell it to someone else, you don’t have to claim the sales proceeds a second time—after all, you found one item of property, not two.
You’re simply selling something you now own, just as if you used income on which you paid taxes to purchase a used car for your teenager, then you turned around and sold the car or traded it in at a later time.
Mitigate the taxes
The tax impact won’t be significant if you find an item of property with a fair market value of only $500 and are in the 25% tax bracket. You’ll owe the IRS $125 ($500 x .25 = $125).
However, if you are a finder and keeper of $10,000, your tax burden will be $2,500 ($10,000 x .25 = $2,500).
- If the $10,000 is in property value, not cash, you’ll still have to come up with $2,500 in cash to pay the IRS if you keep the property rather than sell it, such as if the item of property is something you always wanted to own.
- If you’ve always wanted a Rembrandt and you find a genuine Rembrandt, the art might be more important to you than any cash it would bring in if you sold it.
One way around paying the found property tax bill is to donate all or some of your discovery to a qualified charity.
- When you itemize your deductions, you can claim the donation as a tax deduction, offsetting the income you had to claim.
- No taxes are due, although you won’t have the use and enjoyment of the found property or the money, because you're giving it away.
Unless you live in a state without an income tax, you’ll have to pay taxes on the found property to your state as well. There’s a small silver lining: If you itemize, you can also deduct on your federal return any state taxes you've paid. You might be able to recoup a little and save some tax dollars.
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