Both securities transactions and legal settlements produce taxable income from the Internal Revenue Service's perspective. Recipients carry the burden to report such monies being received when they file their income taxes annually. Not filing such information may get audited since the paying party also files the same information with the IRS as well.
When you sell a security such as a stock or mutual fund share on a public market, it either sells at a profit or loss depending on what you originally bought it for. The IRS requires you to report your transactions and gains on form Schedule D attached to your tax filing (i.e. Form 1040).
Non-market securities, such as precious metals for example, also result in capital gains taxes when sold for profit. These securities also need to be reported to the IRS when filing for income taxes. The difference between purchase and sale prices of a security dictates taxes owed or credit available.
To the extent a legal settlement does not represent a recovery of physical injury, the funds received are considered taxable income by the IRS. If a recovery, the filer has to keep on file documented court action proof if requested by the IRS. Otherwise, the entire settlement adds to income earned in the tax year.
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