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Reporting Class Action Settlements

As a result of having several "managed accounts" in our investment portfolio my wife and I are the recorded buyers and sellers of an awfully lot of different stocks and bonds, with frequent turnovers of these investments.

A few times a year we get notices of class action suits which I usually follow up on and file the requisite proofs of ownership for the time periods specified.

It seems to work out pretty well (if we wait long enough) and every few months a check rolls in for our share of one of those class action settlements, generally not much more than a hundred dollars or so. (I got one last month for 4 cents....WHY do they bother with such a small amount, I guess it's because somebody gets paid for processing and mailing those checks, and they want their share.)

Now to my question. What's the proper way of reporting those class action settlement payments on our tax return (1040)?

I'm favoring showing them as long term capital gains, because in every class action suit where I've filed a claim, we had a capital loss on the investment involved, and I'd consider our share of the settlement as just lowering those losses, hence a capital gain.

Thanks guys,

Jeff

Reply to
jeff_wisnia
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"jeff_wisnia" wrote

Without knowing the underlying basis for the suit, one wouldnt know how to treat the settlement. Some are refunds of excessive fees charged, and would accordingly be treated as a reversal of those charges. I doubt many of the cases have been over improper investment activity or the mere fact that the fund lost money or didn;t make enough.

Reply to
paulthomascpa

Thanks Paul..

One check I received last year from a brokerage firm I'd stopped using about three years ago (when my broker there retired) was in fact reported to me as a reversal of excessive fees charged.

Since I didn't specifically deduct those fees as expenses in the years they were charged because they were included in the net purchase and sale prices of the stocks and bonds involved. When I sold an investment I reported the capital gains or losses derived from the net purchase and sale prices as they were reported to me by the investment firm(s)involved.

That's why I thought the check I received returning "excessive fees" should probably get reported as a capital gain.

I did receive a nice settlement from a FINRA arbitration I initiated two years ago, but it was related to an investment held in my IRA, so I just put it back into the IRA, and the brokerage firm handling the IRA didn't consider it a "contribution".

Jeff

Reply to
jeff_wisnia

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