I am full-time trader (speculating in stocks and bonds) and I have a question on deductibility of legal expenses arising from a contingent-fee lawsuit. My understanding is that recoveries from contingent-fee lawsuits arising from breach of contract are taxed at the gross recovery, not net recovery (e.g. the money I actually get). Summary of situation:
I have Trader Tax Status currently
In the course of my normal trading activities in 2022, I was defrauded by a public company in whose securities I traded.
An attorney has agreed to litigate my claim on a contingent basis.
I will only pursue the lawsuit if I am able to be taxed on the net recovery or can deduct the contingent-fee taken by lawyer
Normally, as an individual, if I receive a $2M gross recovery and the lawyer takes $800k as his contingent fee and I receive $1.2M pre-tax, I would be taxed on the $2M and the $800k fee is not deductible. However, because I have TTS, I believe the $800k is deductible from my income. Is that correct?
Per IRS: “The law considers this [trading in securities by TTS individuals] to be a business, even though a trader doesn't maintain an inventory and doesn't have customers.” Because a business can deduct legal fees in the ordinary course of business, it makes sense that TTS can deduct legal expenses related to the their trading activities.
