Trying to add newer email address and This email is already taken...

The Gmail address is already associated with another Microsoft account, which is why the message appears when trying to add it as an alias.

Microsoft does not support merging Microsoft accounts, and an email address cannot be used as an alias on more than one Microsoft account at the same time. This includes Gmail addresses used to sign in to any Microsoft service (for example, if a separate Microsoft account was ever created with that Gmail address).

To use the Gmail address on the Hotmail-based account, the Gmail address must first be freed from any other Microsoft account it is attached to:

1. Sign in at https://account.live.com with the Gmail address (if possible) and check if it opens a different Microsoft account.
2. If that separate account has no data or purchases that need to be kept, remove or change its aliases so the Gmail address is no longer an alias there, and then close that Microsoft account following the documented process.
3. After the Gmail address is no longer associated with any other Microsoft account, sign in to the Hotmail-based account and add the Gmail address as an alias from Your info → Manage how you sign in to Microsoft (or Edit account info), using Add email.
4. Once added and verified, set the Gmail alias as the primary alias if desired.

Note that while aliases can be moved in this way, Microsoft accounts themselves cannot be merged, and data or purchases from the old Gmail-based account cannot be transferred.

References:

• How to add an email address or phone number to your Microsoft account
• Change the email address or phone number for your Microsoft account
• Add or remove an email alias in Outlook.com
• I realize I have 2 different accounts. How do I combine the 2? - Microsoft Q&A
• How to add an existing outlook.com account to my existing microsoft account? - Microsoft Q&A