Written by Jovan Johnson, Esq., Structured Settlement & Annuity Specialist
Updated September 4, 2026
The sale of structured settlement or annuity payments generally isn’t taxable as income — but there are real exceptions worth understanding before you sell. As always, consult a qualified tax professional before selling.
Taxes When Selling Structured Settlements
If a structured settlement is sold for a lump sum, those proceeds are usually not taxable. Under 26 U.S.C. § 5891(d), if your structured settlement satisfied the requirements of IRC §§ 72, 104(a)(1), 104(a)(2), 130, and 461(h) when it was originally established — which is the case for most personal injury structured settlements — the tax-free treatment continues to apply even after a factoring transaction. In plain terms: selling doesn’t convert tax-free payments into a taxable event, as long as the sale goes through the required court-approval process. The policy behind this is to preserve the financial security structured settlements are meant to provide, regardless of whether the recipient later needs to sell.
Wrongful Death and Personal Injury Settlements
Payments — lump sum or installment — compensating for physical injury, sickness, or wrongful death are excluded from federal income tax under 26 U.S.C. § 104(a)(2). That exclusion covers any interest or investment growth generated during the payout period, and it carries through if those payments are later sold.
Workers’ Compensation Settlements
Structured settlements paid to compensate a work-related injury or illness are also generally not taxable, and selling future payments from one of these settlements doesn’t create tax liability that wasn’t there before.
The 40% Federal Excise Tax — and Why It Isn’t Your Problem
You may see references to a 40% excise tax under 26 U.S.C. § 5891(a) and wonder if it applies to you. It doesn’t, in a properly handled sale: this tax falls on the buyer, not the seller, and only applies if the transfer happens without court approval under your state’s Structured Settlement Protection Act. Every legitimate transaction goes through that court process specifically to avoid this tax — it’s the buyer’s problem to solve, not something a seller going through the normal legal process needs to worry about.
Tax on Annuities (Not From a Structured Settlement)
Tax Implications When Selling an Annuity
Most types of annuities allow the owner to sell payment rights (some accounts, like annuities held inside an IRA, are excluded). Unlike a structured settlement arising from a personal injury claim, an annuity that was never part of a tax-excluded settlement doesn’t get the same tax-free treatment — the annuitant generally owes tax on the gains, and a distribution taken before age 59½ can also trigger the standard 10% early withdrawal penalty on the taxable portion.
Inherited Annuity Tax Implications
Annuity owners can name beneficiaries to receive remaining payments after they die. Whether inherited payments are taxable depends on several factors — see our page on annuity beneficiaries for a full breakdown, and consult a tax professional for estate-planning guidance specific to your situation.
1035 Exchanges
Under IRC § 1035, an annuity owner can exchange their contract for a new one from a different insurer without triggering tax on the transfer — useful if you want a more competitive company or better contract terms. This only applies to a like-kind exchange of the contract itself; modifying your existing contract’s terms without executing a formal 1035 exchange can make future payments taxable.
Partial Annuity Withdrawals
If you withdraw part of your annuity’s value while leaving the rest to keep growing, the withdrawn lump sum is taxable under the LIFO rule discussed on our general annuity tax page — the remaining balance continues to grow tax-deferred.
Are Payments From Qualified Annuities Taxable?
Yes. A qualified annuity is funded with money that hasn’t yet been taxed (commonly rolled over from a 401(k) or IRA), so distributions from it are taxed as ordinary income.
Annuity Transfers and Taxes
Assigning ownership of an annuity to someone else (a family member or friend, for example) generally makes any income accumulated up to that point taxable to the person making the transfer. An exception applies for transfers between spouses or former spouses as part of a divorce, which aren’t taxable. A gift tax may also apply if the transferred value exceeds the current annual gift tax exclusion.
Taxes on Annuity Losses
If an annuity loses value due to a market downturn, that loss generally can’t be declared as a deductible loss or used to offset other capital gains. Tax treatment of losses can differ between qualified and non-qualified annuities — a tax professional familiar with these rules can advise on your specific situation.
Selling Tax Consequences FAQ
Do I owe taxes when I sell my structured settlement?
Generally no, if the underlying settlement was tax-free (most personal injury and workers’ compensation settlements qualify) and the sale goes through the required court-approval process. The tax-free status carries through the sale under 26 U.S.C. § 5891(d).
Who pays the 40% excise tax on structured settlement sales?
The buyer, and only if the transaction isn’t court-approved. A seller going through a normal, legally compliant sale never owes this tax.
Is selling an annuity (not from a settlement) taxed the same way?
No — a standard annuity doesn’t have the same tax-free origin as a personal injury structured settlement, so selling it typically means paying tax on the gains, plus a possible 10% penalty if you’re under 59½.
Does selling my payments affect my beneficiaries’ inheritance taxes?
It can, since selling reduces what’s left to pass on. See our page on annuity beneficiaries for how inherited annuities and structured settlements are taxed.
Sources
- 26 U.S.C. § 5891 — Structured settlement factoring transactions
- 26 U.S.C. § 104 — Compensation for injuries or sickness
- IRS Publication 4345 — Settlements: Taxability
About the Author: Jovan Johnson, Esq. is a structured settlement & annuity specialist with 12 years of experience, based in California. He has also practiced as an attorney in consumer and small business bankruptcy and debt settlement. Annuity Freedom has been helping clients sell annuity payments since 2017.
Disclaimer: This article is for informational purposes only and isn’t a substitute for advice from a licensed tax professional about your specific situation. If you’d like to see what your payments could be worth, you can get a free quote — no obligation.