The 16th Amendment lets Congress tax income “from whatever source derived,” and courts and statutes have read that phrase broadly. Common 16th Amendment examples include wages from a job, profits from a business, interest and dividends, capital gains on investments, self-employment earnings, gambling winnings, and even the proceeds of illegal activity. A smaller set of receipts, notably gifts and inheritances, sits outside the tax by statute rather than by constitutional limit.
The one-sentence text of the amendment is the starting point: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.”1Constitution Annotated. U.S. Constitution – Sixteenth Amendment Congress then defined gross income in matching terms, listing fourteen categories that run from compensation and business profits to rents, royalties, and partnership distributions.2Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined The examples below show how far that reach goes in practice.
Wages and Salaries
The most familiar example is federal income tax on what an employer pays you. Hourly wages, salary, bonuses, and sales commissions all count as taxable income, and your employer is required by law to withhold estimated federal income tax from each paycheck before you receive it.3Office of the Law Revision Counsel. 26 USC 3402 – Income Tax Collected at Source
For 2026, the federal income tax uses seven brackets running from 10% to 37%. A single filer pays 10% on the first $12,400 of taxable income, 12% on income up to $50,400, and so on up to 37% on income above $640,600. Married couples filing jointly hit the top rate at $768,700.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 These are marginal rates. Only the income falling inside a bracket is taxed at that bracket’s rate, so someone earning $60,000 doesn’t pay 22% on the whole amount.
Hiding wage income has hard consequences. Willful tax evasion is a felony carrying fines up to $100,000 and up to five years in prison, and the IRS does not have to prove any particular dollar amount was owed, only that the taxpayer intentionally tried to dodge what was due.5Office of the Law Revision Counsel. 26 USC 7201 – Attempt to Evade or Defeat Tax
Self-Employment Earnings
Working for yourself brings an added layer. Beyond regular income tax, self-employed people pay a combined 15.3% self-employment tax: 12.4% for Social Security and 2.9% for Medicare. Traditional employees split those taxes with their employer; freelancers and sole proprietors pay both halves. An additional 0.9% Medicare surtax applies to self-employment income above $200,000 for single filers or $250,000 for married couples filing jointly.6Office of the Law Revision Counsel. 26 USC 1401 – Rate of Tax The Social Security portion has an annual wage cap that adjusts for inflation.
Interest, Dividends, and Capital Gains
Investment returns are classic 16th Amendment territory. Interest on savings accounts and certificates of deposit is taxed as ordinary income. Dividends are taxed at either ordinary rates or the lower capital gains rates, depending on whether they qualify for preferential treatment.
Capital gains, the profit from selling an asset for more than you paid, have their own rate structure. Long-term gains on assets held longer than a year are taxed at 0%, 15%, or 20% depending on total taxable income.7Internal Revenue Service. Topic No. 409, Capital Gains and Losses For 2026, a single filer pays 0% on long-term gains if taxable income stays below roughly $49,450, 15% up to about $545,500, and 20% above that. Short-term gains on assets held a year or less are taxed at ordinary rates. These sales are reported on Schedule D of Form 1040.8Internal Revenue Service. About Schedule D (Form 1040), Capital Gains and Losses
Higher earners also face the Net Investment Income Tax, an additional 3.8% on interest, dividends, capital gains, rental income, and royalties once modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly.9Internal Revenue Service. Net Investment Income Tax Those thresholds are not indexed for inflation, so more taxpayers cross them each year.
Business Profits
Business income is taxed the same way as wages, but the mechanics depend on how the business is organized.
Sole proprietors report their net profit (revenue minus expenses) on Schedule C alongside their personal return.10Internal Revenue Service. About Schedule C (Form 1040), Profit or Loss from Business (Sole Proprietorship) That profit flows into individual income and is taxed at the owner’s bracket. Partnerships work the same way in principle: the business itself pays no federal income tax, and each partner’s share of the profits passes through to a personal return.
Traditional corporations (C-corps) pay a separate federal income tax on profits at a flat 21%. When the corporation later distributes those profits as dividends, the dividends are taxed again on the shareholder’s return. That double layer is a common friction point for small business owners choosing an entity type.
Gambling Winnings, Found Property, and Illegal Income
The “from whatever source derived” language reaches well past the paycheck.
Gambling winnings from casinos, sports betting, or poker tournaments are taxable. For 2026, payouts of $2,000 or more generally trigger a Form W-2G from the gambling operator.11Federal Register. Increase in Threshold for Requiring Information Reporting Winnings below that threshold are still legally taxable whether or not any form is issued. Lottery prizes are subject to withholding at payout and land on the return at ordinary income rates.
Found property counts too. If you discover something of value and take undisputed possession of it, the IRS treats that as a taxable event when possession attaches.
Illegal proceeds are also fully taxable. In James v. United States, the Supreme Court held that embezzled funds are gross income because the embezzler has an undeniable gain and complete control over the money, regardless of any obligation to return it.12Justia U.S. Supreme Court Center. James v. United States As a practical matter, people convicted of financial crimes often face tax evasion charges layered on top of the underlying offense when the proceeds went unreported.13Constitution Annotated. Sixteenth Amendment – Income Tax
What Doesn’t Count as Income
The amendment authorizes a tax on income, not on every dollar that moves through your hands. Several major categories sit outside gross income by statute.
Gifts and inheritances are the largest exclusion. Federal law provides that the value of property received as a gift or inherited from a deceased person is not part of gross income.14Office of the Law Revision Counsel. 26 USC 102 – Gifts and Inheritances If a grandparent leaves you $500,000, you owe no income tax on the inheritance itself. Anything the property later produces, such as rent from an inherited house or dividends from inherited stock, is taxable going forward. The federal estate tax, which applies to estates above $15,000,000 per individual in 2026, is a separate levy on the deceased person’s estate rather than income tax on the heir.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
U.S. citizens working abroad can exclude up to $132,900 in foreign earned income for 2026, provided they meet the physical presence or bona fide residence test.15Internal Revenue Service. Figuring the Foreign Earned Income Exclusion Certain employer-provided fringe benefits also fall outside gross income, including up to $340 per month in qualified transportation or parking benefits for 2026.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
Even for income that is taxable, the standard deduction shelters the first slice from tax. For 2026, it is $16,100 for single filers, $32,200 for married couples filing jointly, and $24,150 for heads of household.4Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 A single person earning $16,100 or less in gross income effectively owes zero federal income tax.
The Open Question: Unrealized Gains
Every example above involves income that has been realized, meaning converted into cash or another tangible benefit through a sale, payment, or exchange. The Supreme Court’s definition in Commissioner v. Glenshaw Glass Co. described taxable income as “undeniable accessions to wealth, clearly realized, and over which the taxpayers have complete dominion.”16Justia U.S. Supreme Court Center. Commissioner v. Glenshaw Glass Co. That word “realized” is the center of a live constitutional debate.
Own stock that doubles in value but never sell it, and your wealth has grown while your taxable income under current law has not. Proposals to tax that unrealized appreciation, sometimes called billionaire taxes or wealth taxes, raise the question of whether the 16th Amendment requires a realization event before Congress can impose an income tax. The Supreme Court had a chance to answer in Moore v. United States (2024) and sidestepped it. The Court upheld a one-time tax on the undistributed earnings of certain foreign corporations, reasoning that the corporation had realized the income even though the individual shareholders had not, so the broader question could wait.17Supreme Court of the United States. Moore v. United States, No. 22-800 (2024) For now, the amendment clearly reaches the categories above; whether it reaches gains you haven’t yet cashed in is the question courts have left open.