Do the federal tax laws address losses to investors resulting from investment in Ponzi-like schemes?
The federal tax laws do address the tax treatment for losses to investors from the fraudulent conduct of individuals in the investment sector, including losses from a Ponzi scheme. Whether the losses can be deducted as ordinary losses versus capital losses turns, in part, on whether the loss can be characterized as a theft loss. Fraud-caused and Ponzi-scheme investor losses can be treated as ordinary losses when they are “theft losses,” and this characterization was recently further explained in Rev. Proc 2009-20 and Rev. Rul. 2009-9. In general, certain factual circumstances must exist and then a safe-harbor treatment as a theft loss can be utilized (e.g., a criminal complaint, indictment or information plus a freeze of assets or appointment of a receiver) for some of the loss, or the taxpayer needs to show other facts that warrant a conclusion of a theft loss. Deductibility is for the year of discovery, but there is clarification in the two recent IRS releases about when discovery oc
