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How to Report Class Action Payments for Stocks

About once a month I receive an "invitation" to participate in a class action suit over some investment I own or had owned in the past. Because it's so easy nowadays to do an online search of past purchase and sale transactions from the two brokerage firms I'm with I usually can't resist looking up the required data and sending in a claim.

About half of those claims pay off, some for only ten to twenty dollars, but a few have paid me much higher amounts. The remainder get me nothing, often because my share is less than ten dollars and is ineligible for payment per the terms of the suit.

When it comes to tax time I've been reporting those payments as long term capital gains because they are always received more than six months after I purchased the relevant investment.

Am I reporting them correctly?

Thanks folks,

Jeff

Reply to
Jeff Wisnia
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Perhaps. Technically, any proceeds are a return of capital. If you still own the stock, you decrease your cost basis by the amount received. If you've sold the stock, you report the proceeds as either a short-term or long-term capital gain, depending on how long it's been since you purchased the stock. Note that long-term capital gains require more than one year of ownership, not six months.

Ira Smilovitz, EA

Reply to
ira smilovitz

Thanks Ira. It looks like I guessed right with the long term capital gain choice. I've never still owned the relevant stock in any class action suit I've entered into and it's always been at least a year before I receive any payments, sometimes as much as three or four years after I respond to and become a participant in a class action suit.

Jeff

ira smilovitz wrote:

Reply to
Jeff Wisnia

If you never owned the stock, how can it be a capital gain? A capital gain is the profit you make from selling something for more than you paid for it. If you never bought it you never sold it, so you don't have a gain.

Reply to
Barry Margolin

"...never still owned..." = "...once owned, but not now..."

Ira Smilovitz, EA

Reply to
ira smilovitz

Right you are Ira. I don't think I would have gotten unsolicited information about a class action suit mailed to me unless I'd owned (or maybe still own) the stock in question.

Jeff

Reply to
Jeff Wisnia

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