We’re not tax attorneys and consequently we never give tax advice. But as the federal income tax deadline looms, we can tell you that victims of investment fraud may be able to deduct their losses from their yearly federal income tax bills. Overall the procedure for taking this type of deduction is both complex and time-consuming, but if you have been the victim of investment fraud or a ponzi scheme, be sure to discuss the matter with your tax preparer.
Theft Loss Deduction
The Internal Revenue Service allows tax deductions for casualty or theft loss related to your home and items within the home. When an investment adviser or stockbroker intentionally misrepresents investment information, steals funds, or otherwise causes his or her clients to be defrauded, the victim may be entitled to the deduction. In order to take a theft loss deduction, victims must follow the proper procedure. A theft loss may only be deducted in the year it was discovered. The investment must have been made for profit with already taxed funds in order to qualify for the deduction. Further, very small losses may not be deducted. As always with the IRS, documentation is important. Victims who have kept good records and can document their investment losses are more likely to get the deduction.
Given the prevalence of Ponzi schemes perpetrated over the last decade, the Internal Revenue Service has tried to make it easier for victims to recover their losses. Thus, as an alternative to the theft loss deduction method discussed above, the IRS also has established a “safe harbor rule” under which financial victims may have an easier time documenting their losses.
Please note that there are many complicated issues involved in taking a deduction for investment-related theft. This post barely scratches the surface. Our sole purpose in mentioning the theft deduction is to make sure that victims of fraud will at least know to raise the issue with their tax preparers.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.