Ponzi Scheme

Today TaxMama hears from Louis in South Carolina who says, “I lost $30,000 in an ‘’Investment Pool’’ that turned out to be a Ponzi scheme (see link in Resource Box below). The perpetrator was convicted at the end of 2007. How do I claim this loss on my taxes for 2007?”

Ah Lewis,

And you live in the perfect place for such schemes, too – Folly Beach?

Aaaah. Well, the good news is, this certainly seems to qualify for theft loss treatment.

Report this as a casualty loss on Form 4684. Get proof of his conviction to back up your claim that this was theft.

You will be able to deduct the entire $30,000 as an ordinary loss, subject to the limits on personal losses. The deduction will not be limited to the $3,000 per year that capital losses face.

Read this MarketWatch article from February 2004 about
Stock Theft Loss
for the details on how this all works, courtesy of Roger B. Adams, EA in Portugal who did all the research.

And read IRS’s annoyed response to the article – Notice 2004-27 – Loss Deductions for Diminution in Value of Stock Attributable to Corporate Misconduct.

The very bottom of IRS’s notice covers what happened to you.

Sorry you had a bad investment experience. But you’re about to have a good tax experience!

And remember, you can find answers to all kinds of questions about stock theft losses and taxes and other tax issues, free. Where? Where else? At TaxMama.com

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