It appears that at least part of the settlement was a return of your original investment of $50,000. A return of capital would not be taxable. However, in a prior post you mentioned that for tax year 2018, your CPA included your $5,000 loss on your return. So what happened is that you got the benefit of the $5,000 loss for tax year 2018, and now because of the settlement, you are getting your $5,000 returned to you plus an additional $3,000. The $3,000 is probably taxable and should be included on your return using the following method:
In TurboTax online,
- go to Income & Expenses,
- scroll down the page to the last item Less Common Income,
- select Miscellaneous income,
- then from the list select Other reportable income.
- you will have to enter the amount you received plus a short description.
Yes, you should inform your CPA about the settlement you received and remind the CPA that your 2018 return reflects that you took a $5,000 loss on your partnership investment which has now been returned to you as a result of the legal settlement. If it turns out that you need to report the $5,000 in the same manner as the $3,000, then you can again use the above method. However, if your CPA can quantify for you what tax benefit you received as a result of deducting the $5,000 loss in 2018, then perhaps only that tax benefit needs to be taxed for 2021, and the remainder can be characterized as just a return of your original investment and thus, would not be taxable.
Follow-up with additional information if necessary.
@Justin202203
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