See More: Articles

Ponzi Scheme Victims: Theft or Investment Loss?

Gelman, Rosenberg & Freedman CPAs is a member of CPAmerica International, an association of CPA and consulting firms that provides industry knowledge including insightful articles, to help member firms serve clients and other individuals and organizations.

A married couple who became victims of a Ponzi scheme invested with a fund manager – not directly with the fraud perpetrator. So, was the loss a result of theft or investment?

house of cards

The IRS previously ruled that investors who lost money in Bernard Madoff’s Ponzi scheme and other similar frauds are entitled to a theft loss deduction rather than an investment loss.

But the question remained unanswered of how the loss should be classified if the investment was made with a legitimate fund manager who invested in the fraudulent scheme.

This decision is important because a theft loss generally results in a greater tax benefit. It is treated as a fully deductible “ordinary” loss.

In contrast, investment losses are usually treated as capital losses, which offset capital gains. An individual taxpayer may deduct up to $3,000 in any year as a net loss, and excess capital losses are carried forward to future years.

The IRS answered the question in a Chief Counsel Memorandum (CCA 201213022), ruling that the couple was entitled to treat their loss as a theft loss.

In the years that I have been working with Robert Albrecht, he has proven to be one of the most productive, reasonable and reliable auditors I have ever worked with. He takes his time analyzing the audit conditions at HQ and mission level before the audit to ensure that the time spent at our facilities is productive and can be 100% dedicated to the important task of finishing a reliable, complete audit in a timely manner

Luis M. Garcia |  Director of Finance
Action Against Hunger (ACF) International