Submitted By: someone
Answered: January 17, 2021 8:12 pm

I received a settlement from a class action suit involving stock I own. Is this taxable?

Taxation of the payment depends on various factors. If, for example, the settlement was the result of accounting errors erroneously inflating the price of the stock, then the payment is a refund of your initial purchase price. It’s an adjustment to basis if you still own the stock or capital gain that must be reported if you sold the stock before the settlement. If part of the settlement is for punitive damages or interest, these income items are reported as ordinary income.

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Tax Glossary

Section 1231 property

Depreciable property used in a trade or business and held for more than a year. All Section 1231 gains and losses are netted; a net gain is treated as capital gain, a net loss as an ordinary loss.

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