Is a compensatory settlement for theft taxable? My realtor's website was hacked and I lost $15000 to fraudulent instructions. We settled for $7500 from the realtor.

[Opus 17 · Accepted solution]

Your recovery is not taxable since it is direct compensation for an actual loss.  It would only be taxable if you recovered more than you lost, or if part of the settlement was punitive damages.

[Pvpastar]

The defendant real estate company gave me a 1099 misc form for the $7500 box 7 Non-Employee Compensation.  If I report it as such in Turbo Tax it treats it as income.  How do I report it such that it is treated as direct compensation for an actual theft that occured through the realtors website and email?

[Opus 17]

Your best option is to get the payer to cancel the 1099 (issue a corrected 1099 with zero in box 7).  Reimbursement for an actual loss is not taxable.

Or, leave it off your tax return and e-file.  When the IRS sends the automated letter noticing that you did not report it, you will reply with the details of the situation including copies of correspondence, police reports, etc.

Or, you can include the income with an adjustment.  To prevent the income from being classed as self-employment, answer all the test questions as no -- not similar to your job, not intended to earn a profit, not like income from a previous year, not planning on doing the same work next year.  That should get it included as "other income" without SE tax.  Then, go to the section for other uncommon income and enter an item of income with a negative amount that offsets and cancels out the income from the 1099.  The negative entry may prevent e-filing, and the IRS will still probably send a letter asking for an explanation.

Or, leave the income off your return.  Print your return and file by mail.  Attach a copy of the 1099-MISC, and attach a written explanation of why you did not include it as income (but in this case, don't also include your proofs, save those in case the IRS writes back asking for more details.)  This is probably the recommended procedure, but it will delay your refund a bit, and the IRS has been known to lose attachments so you may end up getting an inquiry letter anyway.

[Hus19191]

Hello , is the  settlement for stolen investment is taxable, i got less than what i lost . Thank you 

[MonikaK1]

Under current law, personal theft losses are not deductible unless established as a Ponzi scheme. Otherwise, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return only if the loss is caused by a federally declared disaster. You may not deduct casualty and theft losses covered by insurance unless you file a timely claim for reimbursement and you reduce the loss by the amount of any reimbursement or expected reimbursement. 

See here for more information from the IRS on relief for Ponzi schemes. 

See here for more information from the IRS on deductible casualty losses.

Investigate whether any of the loss due to fraud is recoverable through insurance, such as homeowner's insurance.

If you sold the investment at a gain, and the proceeds were later stolen, you would still need to report the capital gain. 

If the fraud involved overstating the value of your investment and you sold it at a loss, you could have a deductible capital loss. See this article for more information from TurboTax on capital gains and losses.

See this thread for a discussion of various theft/fraud loss scenarios and possible tax treatment.