topic Lawsuit Settlement - Capital Gains vs. Ordinary Income in Get your taxes done using TurboTax

Lawsuit Settlement - Capital Gains vs. Ordinary Income

yogibear123 — Wed, 11 Feb 2026 03:09:30 GMT

A number of years ago we invested in a currency trading investment opportunity which turned out to be a scam. It was not a Ponzi scheme, but upon determining that our investment disappeared, we wrote off the investment as a long term capital loss at $3k per year for a number of years. We are part of a class action lawsuit and in 2023 we finally started to see some of our money returned, about 50%. Our plan was to treat any money returned as a long term capital gain, but we received a 1099-MISC from the law firm. Question – do we have to treat the money received as ordinary income, or is there a way to treat it as a long term capital gain, and if so, how do we show that in Turbo Tax? Thanks in advance for any help.

Re: Lawsuit Settlement - Capital Gains vs. Ordinary Income

Mike9241 — Fri, 16 Feb 2024 23:19:49 GMT

you may have incorrectly written off that loss. you say it was not a Ponzi scheme. if the loss occurred prior

to 2018 it was probably a deductible casualty loss reportable on form 4864 - an ordinary loss reportable on schedule A not a schedule D capital loss. if it occurred after 2018, due to changes in the tax laws, it was not deductible at all because it was not a Ponzi scheme. I think you need to consult a pro to recommend a course of action

Re: Lawsuit Settlement - Capital Gains vs. Ordinary Income

Opus 17 — Sat, 17 Feb 2024 06:10:37 GMT

How long ago was this and how many years did you file a capital loss? The real problem is that you never should have claimed any capital loss until the case was finally settled and the final recovery amount was determined.

As far as I know, a taxable recovery (return of a previous deduction) is always taxed as ordinary income. To treat this as a capital situation, you would have to file amended returns for all the previous years where you deducted the capital losses to remove the original loss deduction and the carry forward years. You will owe back taxes and interest, but if you were only able to deduct $3000 per year, that should be less than $800 per year that you owe. Then, the 1099 would not be taxable at all this year since is a partial return of capital (it would reduce your basis in the original investment). You wait for the case to close so there is no more possibility of additional recoveries and deduct the remaining loss then.

(You also may have had the option of taking a theft loss, if this occurred before 2018. But I don't think the theft loss treatment was mandatory.)