Reporting Lawsuit Settlements

In the I'm-mad-as-hell-and-I-won't-take-it-anymore category, more and more investors burned by stock market losses are joining class-action lawsuits against the companies.

But what if you get a settlement from such a suit? Is this money taxable?

The answer depends on why you got the money. If, for example, it was because you were overcharged for a stock -- because the price was artificially high because of accounting shenanigans (or worse), for example -- the payment is seen as a refund of part of that price. So, if you still own the securities, you should reduce your basis to reflect the payment, and there's no tax consequence until you later sell the stock.

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If you've already sold the shares, however, you're supposed to report the payment as a capital gain on Schedule D for the year you get the check.

But, if any part of the settlement was for punitive damages, that money is taxable as ordinary income.

And, if part of the payment represented interest earned on the settlement before it was paid out, that's interest income.

The settlement agent should be able to help you sort out things.