It sounds odd but there was a Supreme Court about it. Essentially someone claimed they shouldn’t have to pay taxes on the profits of crime and the Court ruled they did. So they had to create a way for people to do that. For what it is worth, the 5th amendment protects you from incriminating yourself, so you are allowed to decline to provide the details of where the money came from, but it’s a bit like paying your parents for something you broke and then just not telling them what it is, and then expecting them not to look around the house.
“it would be an extreme if not an extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime. … He could not draw a conjurer’s circle around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.” … "It is urged, that, if a return were made, the defendant [Sullivan] would be entitled to deduct illegal expenses, such as bribery. This by no means follows, but it will be time enough to consider the question when a taxpayer has the temerity to raise it.”
That’s what ended up getting Capone too: https://www.forbes.com/sites/kellyphillipserb/2018/10/17/al-capone-sentenced-to-prison-for-tax-evasion-on-this-day-in-1931/?sh=2a73f4f27c4c
I love how the government gets to have it both ways. You gotta report income from illegal activities, but you can’t deduct costs from illegal activities. I’m of the opinion that deductions shouldn’t be a thing at all, but I’d at least like some consistency!
