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That last line is what I don't get...how can one pay taxes on illegal income?
This statement is illogical.
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IRS:
"Illegal income, such as stolen or embezzled money, must be included in your gross income."
It's not illogical. Illegal does not mean the laws ignores it.
This is not to say poker winnings are illegal. It is very different to run an unlicensed casino than to gamble in one.