That $9 you got from the PayPal settlement? Taxable income.


If you're like many people, you signed up for the PayPal class action lawsuit and got around $9 for filing a claim against the Statutory Damage Fund. My read of IRS publication 4345 says that this constitutes taxable income. Note: This is just my personal opinion. Consult with your tax advisor before taking action. As for me, I reported it. Given my previous experience with the IRS, I'm willing to fork over the $3 to avoid getting audited.

Comments (12)
  1. Garry Trinder says:

    Are you sure that getting your blog published here for free is not taxable ? ;-)

  2. Jay B says:

    If only we could move to a FairTax like system…

  3. bkaras4 says:

    Please don’t debate FairTax here!  I like reading unsullied comments.

  4. Jon says:

    I believe income under $10 is not required to be reported. (It’s definitely true for interest and dividends)

  5. denis bider says:

    Would I just need to be selling some software for $9 per license then, and all that income would be untaxable? :)

  6. Jerry Pisk says:

    I didn’t know there was a personal injury suit against Paypal, I think you’re basing your opinion on a publication that is not applicable to your case.

    At the same time I would agree that unless the money is for overcharging you it will be considered taxable income.

  7. Phyllis says:

    Jon:  I believe that your bank or broker doesn’t report income under $10 via a statement to you or the IRS, but you’re still supposed to claim it on your taxes.

  8. Andy says:

    It’s a refund of your already taxed income for overpayment, not income.

    That would be saying that if I bought a pair of shoes for $100, realized they charged me $120 and then got a refund of $20 that it would be income. It is not.

  9. According to my read of form 4345, compensatory damages are not taxed, but punitive damages are.

  10. pcooper says:

    You have to report *all* income.

    One of my favorite IRS quotes:

    "Illegal income. Illegal income, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity." — IRS Publication 17, Your Federal Income Tax <http://www.irs.gov/publications/p17/ch12.html#d0e32305&gt;

    Bribes and Stolen Property must also be reported.

  11. silkio says:

    pcooper said:

    "One of my favorite IRS quotes: "

    You might find that’s in there as a tool to use on criminals, not as any real expectation of them really reporting it.

    If they discover such income on a drug dealer or theif, they can prosecute them under tax law as well as criminal.

  12. I just want to know one thing:

    How much did the lawyers involved in the settlement get taxed after they got paid?

    James

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