You know those puny checks you get from class action settlements that don't tell you whether to declare it as taxable income or not? Then they tell you to consult your tax advisor, as if you want to incur professional fees, too, to account for a small check.
The easy answer depends on whether or not you still own the stock. Here is what you should do in most cases:
If you still own the stock, record the class action claim check amount as a return of capital and reduce your basis in the stock. If by some miracle the class action claim check amount exceeds your remaining basis in the stock, record the excess as a capital gain distribution.
If you already sold the stock (probably at a loss, since there was a class action filed against the company), record the class action claim check as a long term capital gain distribution and report it as a capital gain in the year that you received the check.
Some class action claim check cases are a little more complicated. For instance, a portion of the recent Janus Fair Fund checks may be required to be reported as ordinary income. Detailed instructions are available at this link:
Another complicated case is the AIM/Invesco Fair Fund claim settlement checks paid in 2009 which included both a "loss" component and an "advisory fee" component which may be ordinary income. The calculations for these settlements are beyond the scope of this website, but more information can be found at this link:
Information provided is intended solely for cash-basis U.S. citizen individual taxpayers and is believed to be accurate for most cases but is not guaranteed. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please email our webmaster @ costbasis.com with your comments. If this website has been helpful to you, please consider making a donation to support our efforts.