It’s well known that frivolous lawsuits cost billions of dollars each year, but few people know about a shadowy subset of financiers — sometimes overseas — who are intensifying the problems in America’s legal system. A loophole in today’s tax code effectively allows third parties to rake in money from lawsuits with little to no tax liability.

This is the third-party litigation funding loophole, and it’s time to end it. Crazy as it sounds, the judicial system currently allows billionaires to fund lawsuits in which they aren’t the victims, without any disclosures or conflict-of-interest statements, and their payouts are structured as capital gains, not regular income, yielding a big tax break.

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The financiers behind these lawsuits are paying taxes at a reduced rate while the actual victims in these court cases are hammered by a top marginal rate of 37% plus a 3.8% surcharge. For those who are “investing” in TPLF schemes, the return on investment is often 100% or more.

This kind of judicial speculation is fundamentally just a wager on someone else’s court case, almost like what happens on the betting sites Kalshi and Polymarket. Of course, profits from this kind of gambling are taxed as regular income, not capital gains,........

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