Are FINRA Awards and Settlements Taxable?
While working as a financial adviser for Wells Fargo in Florida, Paul Zoch has been accused of helping to lure investors into a fraudulent movie financing scheme and of mishandling other clients’ funds. For Wells Fargo, the movie scam and other charges are merely the...read more
The Financial Industry Regulatory Authority (FINRA) provides victims of fraud, mishandling of funds, and other investment problems with avenues to recover some of their losses from financial advisors and brokers who steered them wrong or caused them direct financial harm. If you or a loved one faced this kind of treatment, you may be able to file for arbitration through FINRA. This can provide you with damages and other relief. Many who seek FINRA awards run into common questions about whether these damages and settlements are taxable. If you have tax law questions, it is important to talk to a tax attorney about them. However, our FINRA arbitration lawyers at Epperson & Greenidge do have some information for you about when awards are taxable.
Understanding Taxes for Investments
The FINRA website is especially tight-lipped about whether FINRA awards are taxable. Since they are not attorneys or tax professionals, they do not want to mislead anyone with information regarding taxes. It is important to understand that if you have complex questions about your taxes or the taxability of your FINRA awards, you should contact a tax attorney. The following is all general information about tax law and taxation for settlements to help you understand the risks and rewards associated with FINRA claims, but should not be considered legal advice.
Usually, any money you receive can be taxed. This includes income, profits from sales, rent you collect from tenants, and other money. There are also other exceptions where the recipient does not pay any tax, such as for gifts or inheritances.
Most investments are treated like property, not money. That means that a share in an investment, such as a common stock on the stock market, is considered property you own. When you buy an investment, it has some market value. This value, typically the amount you paid, is the “cost basis” of the item. This reflects its initial value, based on what you paid into it.
As the investment grows in value, you do not “recognize” its increased value, since you don’t actually get more money. Instead, you recognize the profits when you sell the item. The profit is calculated by subtracting its sale value from the cost basis (the initial value you paid). These gains, known as “capital gains,” are usually taxable.
This is a detailed explanation of what is probably obvious to many taxpayers: if you make a profit off an investment, the IRS wants you to pay taxes on it. However, if you suffered a loss by selling off an investment that was worth less than your initial investment, you may be entitled to claim that as a loss on your taxes. This can usually mean a deduction from your capital gains taxes in the year you sold it – though these can sometimes carry over into other years.
Are Damages from FINRA Claims Taxable?
The settlement you receive from FINRA is closely related to long-term investments. In most FINRA cases, the damages you seek are to make up for the losses you faced in some investment. For instance, if your financial advisor sells your shares without permission, mishandles your funds, or outright steals your money through a Ponzi scheme, the damages you receive would be an attempt to recoup your losses. This may mean that the damages are not profit or income at all, but rather compensation for losses on an investment. This money may calculate into your capital gains or capital losses, working to reduce your loss. Many settlements or awards of this type may be offset against your initial cost basis to determine whether or not they are taxable. However, the rules are very situation-specific.
The type of account often has a heavy hearing on whether the settlement or damages are taxable. Damages based on tax-deferred accounts like IRAs and taxable investments like stocks may have different tax consequences for the awards you receive in arbitration.
Many FINRA claims have additional elements to the damages. When a broker or financial advisor is especially negligent, you may be awarded “punitive damages” in your case. These are additional damages the arbiter orders the negligent broker to pay you in order to punish the broker. These damages are not compensation for anything and are likely taxable. Cases may also include damages to reimburse you for attorneys fees, which follow other rules.
FINRA Claims Lawyers Fighting for Investors
If you or a loved one is considering making a claim against your financial advisor or another investment professional for money you lost on a bad investment, because of bad investing advice, or because of predatory or harmful brokerage practices, talk to one of our attorneys today. The FINRA claims attorneys at Epperson & Greenidge represent victims of bad brokers and crooked financial advisors to help you get compensation. For a free consultation on your case, call our law offices today at (877) 445-9261.