Is Ponzi Scheme loss deductible?

Forum|Forum|2 years ago
September 27, 2023
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What is considered a business theft? Is Ponzi Scheme loss deductible?

Ask the Experts - Extension - Sept 2023

Best answer by RobertB4444

@RobertB4444

Thanks so much for the very helpful info Robert!

Since I will enter the Negative amount of the unused loss from the prior year in NOL. Should I still have to complete the 4684 form - Section C by filling out the same data (original Casualty & Theft Loss) as I did for the prior year tax return? Or I can just file the NOL?

The reason I'm asking because I try to understand how do we refer the unused loss carryover from the prior year to the IRS if we don't complete the 4684 for this year? how does IRS figure out the carryover number of this year? would they have to go back to your prior year tax return to see or IRS system would automatically figure it out since your tax return info has been stored in IRS system?

Thanks so much for your valuable helps!

You're just entering the NOL. Your 2022 tax return shows the loss and if the IRS is trying to see where it came from they will look at that. You only fill out the 4684 in the year of the loss.

@Hanna20

quorumof1

Hi There:

It would be related to an established business proven by prior year business tax returns, business licenses, police reports, etc. The location of the theft and its relation to an established business address would likely be a major factor.

Joe_D-CPA-PFS-CFP

Hi zhoul888,

On the Ponzi Scheme question:

Here is a website for Help for Victims of Ponzi Investment Schemes .

In Revenue Procedure 2009-20, the IRS stated that you can choose not to use its Ponzi scheme tax relief safe harbor, but then you face the general rules for deducting a theft loss.

Under the general theft rules, you need to establish:

-that the loss was from theft;

-that you claimed the theft-loss deduction in the year you discovered the theft

-the dollar amount of the theft, through sufficient documentation; and

-that no claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery in the taxable year you claim the theft-loss deduction.

SAFE HARBOR

The IRS will not challenge a Ponzi scheme victim who uses the IRS tax relief safe harbor as to the following treatments of the loss:

1. The Ponzi scheme loss is deductible as a theft loss.

2. The loss is deductible in the year of discovery, which (under this tax relief safe harbor) is the year a lead figure in the Ponzi scheme is:

charged by indictment with the commission of fraud, embezzlement, or a similar crime;
the subject of a state or federal criminal complaint and either (a) admits guilt, or (b) has his, her, or its assets frozen by a court-appointed receiver or trustee; or
the subject of the fraudulent arrangement but (due to his or her death) faces no charge by indictment, information, or criminal complaint (this condition also requires either that a receiver or trustee was appointed with respect to the arrangement or that assets of the arrangement were frozen).

3. The loss amount is computed using the safe-harbor formula, which allows either 95 percent or 75 percent of the loss in the year the Ponzi scheme victim files the safe harbor.

The tax relief safe harbor truly simplifies the Ponzi scheme theft-loss deduction for the victim.

Establishing the Safe-Harbor Ponzi Scheme Loss in Your Tax Return

To use the safe harbor, you need to comply with its requirements. These include required statements and declarations you make under penalties of perjury on IRS Form 4684, where you:

name the Ponzi scheme perpetrator;
state that you have written documentation that supports the amounts you are claiming for deduction;
declare Ponzi scheme victim status as a qualified defrauded investor; and
abide by other terms of the declaration.

Hope this helps.

Hanna20

I’ve claimed the Ponzi Scheme Loss last year 2023 as safe harbor: 95% deductible from total investment loss and can be carryover for the next 20 years; in 4684 form - Section C (Casualty & Theft Loss: I invested the cryptocurrency as individual investor to a scam platform, then lost all the money. The scam platform blocked me and disappeared after when I tried to withdraw the money).
As for the tax return this year 2024, where can I claim the Carryforward/over loss?

• Will the Carryover loss continue be claimed as business Net Operating Loss (NOL) as unlimited or it should be claimed as individual Capital loss limit to only $3000 per year in schedule D? I invested myself as an individual investor and lost all the money, NOT that I invested on behalf of or from my business (company, LLC, INC…)

The confusion of IRS law is the Ponzi Scheme Loss is considered as the business investment loss, but not sure if it allows the Carryover Loss for the next 20 years continue to be claimed as NOL unlimited;
or it must be back to individual to be able claiming only $3000 per year infinitely in time (similar to stock loss)?

Thank you so much and I appreciate your helps and time!

Truly,
Hanna

RobertB4444

If you had entered the investment loss into schedule D then it would have been classified as a long term capital loss and would have been carried over as a long term loss to be written off against other investment income or at $3000 a year until it is used up.

Since you entered it as a casualty and theft loss the amount that you received credit for is carried forward as an NOL for up to 20 years.

In order to enter it into this year's return just type "NOL" into the search bar and then click 'jump to' and it will take you to the section to enter the prior year's unused loss.

@Hanna20

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