Submitted By: Jeff
Answered: June 8, 2015 8:14 am

I received a cash award as a settlement in a securities litigation. The stock had been held in a taxable account but was previously sold?

There’s no simple answer. The tax treatment of the award—as ordinary income, as capital gains, or as a nontaxable return of investment—depends on the origin of the claim. The question you have to ask is how would the income have been taxed had the actions triggering the litigation not occurred since compensatory damages are a replacement for that income. (Any punitive damages are automatically treated as ordinary income.) The terms of the settlement may spell out the characterization of the income. For example, if the award represents ordinary income and the settlement says this is so, likely you will receive a Form 1099 describing the award as ordinary income. If you have concerns, talk with a tax professional.

Tax Glossary

Earned income credit

A credit allowed to taxpayers with earned income or adjusted gross income (AGI) below certain thresholds.

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