Submitted By: someone
Answered: November 28, 2022 9:30 pm

This year, I received stock valued at $100,000 in settlement of a claim for damages. I sold the shares later this year at a significant loss. How do I report this?

The value of the shares ($100,000) received in the settlement likely are fully taxable, assuming this was not for a claim of personal physical injury or illness. Loss on the sale of the shares—the difference between the $100,000 basis and what was received—is a short-term capital loss because the shares were not held for more than one year. The loss may be used to offset capital gains, with any excess offsetting $3,000 of ordinary income; any remaining excess loss is carried forward. If you have not realized capital gains against which the loss on the shares can be offset, the current deduction will be limited to $3,000. Given this situation, it may be advisable to sell before year-end any securities being held that would generate capital gains for which the losses can be used as an offset. Then the stock can be repurchased to reestablish the same investment holdings; the only downside is transaction costs. The wash sale rule, which bars a current deduction if substantially identical securities are acquired within 30 days before or after the date of sale, applies only to losses; it does not apply to sales at a gain.

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Tax Glossary

Hobby loss

Hobby expenses are deductible only up to income from the activity; loss deductions are not allowed.

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