Law Suit Winnings vs. Capital Losses

[jprroth1]

What is the name of your state (only U.S. law)? Florida

Have $250K unrealised stock market loss.
Awarded $125K in arbitration against U.B.S.

Is settlement ordinary income?
If I sold my losing stocks to generate a realised capital loss,
isn't my settlement money a capital gain to offset capital loss?

Is the arbitration settlement Gain for my stock losses
linked by the " Origin of Loss " ?

What is proper treatment?

thanks,

j

 

[tranquility]

Settlement proceeds tend to take the character of the lawsuit items being sued upon. What was the suit about?

 

[jprroth1]

unsuitable/inapropriate asset allocation,
lack of diversification

 

[azlawstudent]

This is something you would need to take in to a reputable tax attorney and get an opinion letter on. The terms of the settlement agreement and the specifics of the suit are determinative of whether or not the settlement is included in income. Just because a settlement purports that certain monies are for certain types of damages doesn't mean they actually are for tax purposes. Nothing anybody tells you here could give you an honest answer as to the tax treatment of your settlement.

 

[tranquility]

An opinion letter from a tax attorney will cost tens of thousands of dollars so, while protection from penalties is always good, you can probably just see any competent tax professional to give you an answer. You will probably need to sign a release for the tax preparer to contact and communicate with your attorney.

You need to bring in the complaint and the decision and the facts. Misallocation is a breach of fiduciary duty and may have a multiplier on it. The multiplied portion is clearly ordinary income. The direct damages may be treated as though you sold the stock at this increased sales price. You may have to deal with the "tax benefit rule" regarding deduction of prior losses because of this. You don't want to do this on your own, see a tax professional. There is no reason to waste at least 10% of your settlement for an opinion letter.