Tax
Feb. 12, 2026
Can defamation damages be taxed as capital gain?
Although the IRS generally presumes litigation recoveries are ordinary income, damages in some defamation cases--particularly those involving harm to professional reputation or goodwill--may qualify for capital gain or basis recovery.
Robert W. Wood
Managing Partner
Wood LLP
333 Sacramento St
San Francisco , California 94111-3601
Phone: (415) 834-0113
Fax: (415) 789-4540
Email: wood@WoodLLP.com
Univ of Chicago Law School
Wood is a tax lawyer at Wood LLP, and often advises lawyers and litigants about tax issues.
Legal claims of harm to reputation can be about personal reputation, professional reputation or both. The IRS presumption with most litigation recoveries is settlements are ordinary income, but capital gain treatment is available in some cases, even some cases of defamation. Examples of legal claims where investigating capital gain treatment can be worthwhile inclu...
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