This is similar in concept to how debt forgiveness works. Generally (there are exceptions), debt that was defaulted on gets taxed as though it was income becau

This is similar in concept to how debt forgiveness works. Generally (there are exceptions), debt that was defaulted on gets taxed as though it was income because it was planned/expected to be income for the creditor, upon which taxes would be paid. It's also similar to how other non-monetary transactions are treated in the tax code. For example - bartering. Legally, if I agree to fix your roof if you repair my vehicle, that is, under the law, a taxable event. It's just that such things are very hard to enforce in that kind of situation. This is essentially applying the same concept. It's not hypothetical. Something of value is being received/transferred. That is a taxable event, but here it is much easier to enforce because there are numerous records proving that it occurred.