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You must pay taxes on all income, however earned. However, you are not entitled to deduct all expenses. Expenses related to criminal endeavors cannot be deducted.

IOW...you are taxed on your gross criminal income.

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I am basing this on remembering one case here in The Netherlands where this supposedly happened, when a bankrobber had to pay a sum of money, but he could put up his pistol as expenses. [1] The Districts Attorney's office was quoted on saying that in certain cases this could be done. Also stating that for example in the cultivation of marijuana, you get taxed for an estimated income amount. You could subtract your expenses n that estimation.

Maybe that's better in the U.S. then..

[1] http://www.nu.nl/algemeen/472183/crimineel-kan-pistool-decla...

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