Can You Take a Tax Deduction for Losses in a Ponzi Scheme

[Cosmic Zamboni]

I have a neighbor that lost $250,000 in a Ponzi scheme in 2007. Criminal charges were filed in 2008 and the guy went to prison in 2010. Would this be considered a capital loss? Can he amend his tax returns to take the $3000 a year in losses? It's only a small consolation for such a large amount lost, but anything is better than nothing.

[flyingron]

http://www.irs.gov/taxtopics/tc515.html

[Cosmic Zamboni]

Okay, so it is not a capital loss but a theft loss? Can he take that full amount as a loss on his 2011 tax return? If so then he would not owe any taxes for 2011 I'm guessing.

[Bubba Jimmy]

It is not a capital loss because the money was not actually invested in an asset that decreased in value, it was stolen. The problem your neighbor is going to have is that this loss must be applied to his 2008 tax return. The ability to amend 2008 to claim a refund ends three years after the due date for the 2008 return. That means it would have to be filed by tomorrow. That is becaue the tax code states that the statued of limitations on amended returns for prior years to claim a refund is three years. There is no mention of what happens if that date falls on a weekend or holiday. In establishing the actual due date for returns there is such a provision for weekends and holidays, but not for prior year amendments.

An NOL for 2008 could potentially wipe out any tax liability (and tax paid) for that year. If the entire amount is not used up, the unused portion could be carried back three years and then forward each year until it is used up. However, it needs to be done REAL REAL quicly!

[flyingron]

Yes, it runs from the time theft was discovered (i.e., charges filed). I'd file the 1040X and recompute the 2008 tax liability and get it mailed tomorrow.

The IRS actually has a procedure for PONZI schemes that I didn't even notice before.
http://www.irs.gov/irb/2011-50_IRB/ar11.html

Yes, the loss is taken in the year it is "discovered" which the IRS defines as when the indictment occurred.

Here's their Ponzi guidance: http://www.irs.gov/irb/2011-50_IRB/ar11.html

I'd be filing a 1040X to reduce is 2008 taxable year income to $250K (or whatever gets him to zero) and get it mailed tomorrow.