@bamafan4 wrote:
So along these same lines, I received a settlement check stemming from a class action against Inovio Pharmaceuticals. The settlement was for far less than the loss I sustained due to the drop in the stock price. I have claimed that loss on previous tax returns to offset other capital gains. If the amount of taxes offset by the sale of the stock plus the settlement amount is less than my total loss, the settlement does not need to be reported, Correct?
Not if I understand what you did. It's a long term capital gain in your case. Because you sold the stock and realized a loss, and got a tax benefit from the loss, the payment is a capital gain, as if you sold the stock for more.
You can't deduct a loss on a stock unless you sell it, of course. The lawsuit would have stated, some bad actions damaged the stock price, and if not for the bad actions, the price would have been higher.
So suppose you bought the stock for $1000 and sold for $500, you have a $500 loss. You get paid $250. the argument now is, if not for the mismanagement, you would have sold for $750 and realized only a $250 loss. Since you realized the $500 loss and are now being paid $250, you must treat that as a capital gain, to put you in the position you would have been (both income and tax) if the selling price had been higher.
