How to Handle Qualified Investment Losses from a Ponzi Scheme

Jon Vincent Forehand

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Posted over 5 years ago. 3 helpful votes

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1

Determine if you qualify for relief

The safe harbor provision can be used only by a qualified investor in a taxable account, not a tax deferred account, where a lead figure was charged under federal or state law with fraud, embezzlement or a similar crime and the investor invested solely with the lead figure and not through a fund.

2

Determine what you can deduct

Under the optional safe harbor, a qualified investor can deduct 95% of the qualified investment if he is not pursuing any third-party recovery or 75% if pursuing or intending to pursue third-party recovery. The qualified investment is the sum of cash and the basis of property invested in the scheme over the years, plus income derived from the scheme that was included for federal tax purposes in the investor's income, minus any cash or property withdrawn by the investor from the scheme. No deduction is allowed for any actual or potential amount covered by the Securities Investor Protection Corporation (SIPC) recovery or insurance.

3

How to claim the deduction

Qualified investors can claim the safe harbor deduction in the year of discovery, which is usually the year in which the lead figure has been indicted. Attach to your return for the year of discovery a form found in Appendix A of Revenue Procedure 2009-20. The deductible theft loss should be entered on line 34, Section B, Part 1 of Form 4684.

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