Canceled debt is ______________.

Canceled debt is not included in gross income when the debt qualifies as a gift because the Internal Revenue Code treats gifts differently from other forms of income. When a debt is forgiven or canceled as a part of a gift, it doesn’t create a taxable event for the recipient. This principle is grounded in the notion that gifts are not considered income, and therefore, the cancellation of debt in this scenario does not result in any income inclusion.

In contrast, other situations, such as discharges during bankruptcy or insolvency, may result in taxable income. Specifically, if a debt is discharged during bankruptcy proceedings, it may be included in gross income unless specific exclusions apply. Similarly, if a taxpayer is insolvent when a debt is discharged, that canceled debt might also be included in gross income, subject to limitations. Therefore, the treatment of canceled debt as a gift aligns with the broader tax laws that exclude gifts from taxable income.