This bill creates a new federal tax on profits earned by third-party litigation funding companies—firms that provide money to finance lawsuits in exchange for a share of the settlement or judgment. The tax rate equals the top individual income tax rate plus 3.8 percentage points, and applies to companies, individuals, partnerships, and foreign entities that receive litigation financing proceeds. The bill exempts small agreements (under $10,000) and traditional loans with reasonable interest rates from the tax. Payors involved in the litigation are required to withhold 50 percent of the applicable tax from payments made to third-party funders, similar to how employers withhold payroll taxes. The changes take effect for tax years beginning after December 31, 2025, and are designed to discourage what supporters view as predatory litigation funding practices by making them more costly.
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