Qualifying For Safe Harbor
In the event the taxpayer does not qualify for the Safe Harbor which is often the case since many Ponzi Schemes do not reach the level of the perpetrators being found to be criminals.
There is still the distinct possibility that victims of Ponzi Schemes may recover under the Code Section in the Internal Revenue Code that permits the deduction of a theft loss that is incurred in a trade or business or a theft “transaction” entered into for profit.
It is very helpful when seeking the deduction to make use of a criminal attorney who will look at the fact pattern of the theft and be able to opine that the theft loss rises to the level that may warrant criminal prosecution even though the authorities have not proceeded in that direction.
It is very important to note that under the new Trump Tax Cut & Jobs Act, a theft loss that is not a result of a trade or business loss or a loss incurred in a transaction entered into for profit will no longer be the subject of a theft loss deduction.
This is an updated video presentation on the topic and includes new Tax Cut and Jobs Act of 2017 modifications for Ponzi Scheme victims.
ADDITIONAL RESOURCES: This is an article written by Richard S. Lehman, and it provides a more lengthy description of several of the principals discussed in the Ponzi Scheme Theft Losses, originally published in BNA February 2011 Article. TAX MANAGEMENT BNA Real Estate Journal Vol 27, No2, Feb 2011 Ponzi Scheme Tax Losses download article here.