payment by Legal settlement on Ponzi scheme

[Will610]

Hi need your advice on the payment by by Legal settlement.
My client lost around $700,000 (!!!) due to a investment fraud ( Ponzi scheme ). She has been working with lawyers to get them back as much as possible.
last year she had a settlement with the brokerage company on $28,500 and 1098-MISC for that.
Does she need to include $28,500 as other income ? or anyway to exclude it as nontaxable income ?
Thank you

[MDEA]

Was the loss ever taken?

[Will610]

yes, only $3,000/year as a capital loss for 2 years ( by the previous tax preparer )

[TAXNJ]

yes, only $3,000/year as a capital loss for 2 years ( by the previous tax preparer )

What have you researched so far?

https://www.irs.gov/newsroom/help-for-victims-of-ponzi-investment-schemes

[Will610]

TAXNY , I read the site but no mentioning on the settlement fee.
MDEA, 6,000 loss has been used as a capital loss. but I think she should claim it as a theft loss.
What I can't figure out is if 1098-misc was issued for the settlement payment has to be included in income.

[TAXNJ]

TAXNY , I read the site but no mentioning on the settlement fee.
MDEA, 6,000 loss has been used as a capital loss. but I think she should claim it as a theft loss.
What I can't figure out is if 1098-misc was issued for the settlement payment has to be included in income.

Did you read the q & a ?

[Burke]

Based on your statements about taking a capital loss of $3K for 2 years, the TP apparently did not claim a Ponzi scheme theft loss. If it is still within the 3 yr amended period, then it appears they would have to amend to claim the required safe harbor amount for the year in question (IMO based on reading the IRS ruling/procedures mentioned above.) If the TP qualifies for the 95% deduction, that would be $665K, a difference of $35K, which is less than the amount received of $28,500, so the amt received would not be taxable until the recovery amount exceeds $35K. Non-taxable amt remaining for future years would be $6,500. (I think you mean a 1099MISC form was received to be reported as income, not 1098.) I would think such a large loss would generate an NOL.