Richard S. Lehman Answers Current Ponzi Scheme Theft Loss Tax Questions

QUESTION:

How many years may a theft loss be carried back from the year the loss is reported?

ANSWER:  The investment theft loss forms part of the taxpayer's operating loss that may be carried back or forward under normal net operating loss rules.  Generally these rules provide for a three year loss carryback and 20 year loss carryforward (or "carryover") limitation.

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QUESTION:

Is a theft loss deductible as a capital gains or ordinary income?

ANSWER: The investor is entitled to an ordinary loss rather than just a capital loss.  The IRS considered a Ponzi scheme theft loss to be a loss that is incurred in a transaction entered into for profit.

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QUESTION: 

Can a taxpayer claim a theft loss for income that was reported for tax purposes and not distributed to the victim.

ANSWER:  A taxpayer will receive basis for taxes paid on "phantom income" that was credited to the investor's account, whether or not it was paid to that account by the Ponzi scheme.

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