The tax implications of litigation finance may vary depending on your individual circumstances. There are many instruments currently used in the litigation finance industry. In the commercial space, advances and equity stakes are more frequent. Given there are no standards across the industry, the specific instrument that is used, as well as your own circumstances will dictate the kind of tax treatment that will impact you.
The best way to understand the tax implications of your specific circumstances is to ask your attorney. Important questions for you and your attorney include: 1) what kind of instrument is being used to finance your litigation? 2) are you suing as an individual or a business -- if a business, what is the corporate structure of your business? 3) Did the funder issue you a 1099? Further direction can be provided by your attorney.
The reality is that litigation finance and legal funding are relatively new areas and many of the regulations that are commonplace in other industries are yet to be formalized across states for these industries.