Embezzlement proceeds are not taxable because the embezzler has an obligation to repay the funds.

Question

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Embezzlement proceeds are taxable income and must be reported on one's tax return. The fact that the embezzler has an obligation to repay the funds does not affect the taxability of the income. However, if the embezzler repays the funds in a subsequent year, they may be able to claim a deduction for the amount repaid as a theft loss on their tax return.

Embezzlement Proceeds Are Not Taxable Because the Embezzler Has an Obligation