The Significance of the criterion of illegality in the taxation of income

Abstract

Summary This article focuses on the analysis of the issue whether income from illegal activity should be taxed and if so, by what means. The aim of the article is to analyze issues related to the legality of commercial activity when a legal entity in not established and criteria of its definition. The article a/so offers an overview of the established practice relating to the matter in question in states of the Western law. Taxation of illegal income is quite common in many foreign countries but this practice is not yet applicable in Lithuania, though recent movements of the finance minister of Lithuania when she admitted that all income should be taxed despite it's source, shows her positive attitude towards the taxation of illegal income. The article promotes the idea that all personal income despite their source should be taxed. The article is divided into two parts: the first part presents the problem of defining personal commercial activity itself and its legitimacy and the second part focuses on the problem of the taxation of illegal income with rules of deduction and declaration. The analysis is based on general definitions of terms and income in Lithuanian law which defines income quite generally as well as all benefits received by a person in monetary or other forms. Lithuanian law does not indicate clearly that personal income for tax purposes has to be only from legal sources. So, in this case, we can say that there is no formal interference to tax illegal income. The main focus is on the one of the oldest countries which has the longest practice in taxing illegal income - US, where in the year of 1916 the Congress changed Internal Revenue Code which stated "gross income means all income from whatever source derived". From that day, courts of US have gone a long way describing what earnings from illegal source have to be classified as taxable income.[...]