Congress should close the tax loophole letting foreign litigation funders avoid US taxes on lawsuit winnings
Source: "Foreign lawsuit funding loophole costs Americans and Congress is urged to act | Fox News." November 9, 2026. www.foxnews.com
The Gist
The author says foreign investment funds pay for American lawsuits and then collect a cut of the winnings taxed at little or nothing, while the American plaintiff pays higher taxes. He argues this unfairly harms Americans by raising costs and encouraging lawsuits, so Congress should close the loophole quickly and use the money for tax relief.
Conclusion
Congress should close the foreign litigation-funding tax loophole this year (or the executive branch should act if Congress fails) and direct the resulting revenue toward pro-growth tax relief for Americans.
Premises
- Foreign funds that finance US lawsuits receive their share of winnings as capital gains, which are taxed at a lower rate than the ordinary income tax paid by American plaintiffs, and foreign investors generally owe no US tax on US-sourced capital gains, so their effective rate is often zero.
- The capital gains preference exists to reward risk-taking investment that promotes production and economic growth, but foreign litigation funders profit from lawsuits that drain resources from American producers rather than from growth.
- Foreign litigation financing encourages litigiousness, drains money from the US economy, and raises costs for American businesses, which translates into higher consumer prices for goods like groceries and gas.
- Because of this preferential tax treatment, American taxpayers are effectively subsidizing a practice that harms them, a view endorsed by Treasury Secretary Scott Bessent, who called it a 'malignancy' on the judicial system.
- There is enough time for Congress to act this year, since it is in session for at least five more weeks, can add days, and could use a planned reconciliation bill as the vehicle.
- Closing the loophole would raise billions of dollars in revenue that could fund pro-growth tax relief.
Assumptions
- The tax treatment described (capital gains and zero US tax for foreign funders) is accurate and applies broadly to litigation-finance arrangements.
- Foreign-funded litigation meaningfully increases the volume of lawsuits and thereby consumer prices.
- The purpose of the capital gains preference is solely or primarily to reward growth-oriented investment, and litigation finance does not qualify.
- Closing the loophole would not simply reduce funding or push arrangements into other structures, so revenue gains would materialize.
- The harm of foreign funding is distinct from that of domestic litigation funding, so singling out foreign funders is justified.
- Appeal to a Treasury Secretary's characterization is evidence of the policy's merit.
- Legislative or executive action is feasible and legally permissible within the proposed timeframe.