Tackling Predatory Litigation Funding Act

Summary

Creates new federal tax rules for litigation financing by (1) removing litigation-financing financial arrangements and proceeds from the definition of “capital asset” and (2) excluding certain "qualified litigation proceeds" from gross income. The bill changes how proceeds and arrangements tied to third-party litigation funding are treated under the Internal Revenue Code. Those changes take effect for taxable years beginning after December 31, 2025. The measure will directly affect parties that receive litigation financing and entities that provide or invest in such financing, and it will require IRS guidance and new tax reporting and compliance practices to implement the new definitions and exclusions.

• Adds a new exclusion to the capital asset definition to omit litigation-financing arrangements and proceeds.
• Creates a new Internal Revenue Code section (139J) that excludes "qualified litigation proceeds" from gross income.
• Applies to taxable years beginning after December 31, 2025.
• Requires updates to tax reporting, administration, and IRS guidance to implement exclusions and definitions.
• Directly affects recipients of litigation funding and the entities that provide or invest in litigation financing.
• Could change whether proceeds are taxed as capital gains, ordinary income, or not taxed at all depending on the new definitions.
• Includes technical table-of-contents changes to reflect the new tax provisions.