Ponzi Losses Deductible

From the Boston Herald’s TaxSmart advice column:

Dear TaxSmart:

I’m a 76-year-old Ponzi scheme victim. My financial adviser scammed me and other clients out of $3 million. (He eventually went to prison.) At my age, I feel I’ll never recover what I lost. The firm my adviser represented claims it’s not liable because he resigned prior to the fraud.

Can I at least deduct my losses from my taxes?

 — Rosemarie, Weymouth


Dear Rosemarie,

I may have some very good news for you!  Regarding Ponzi schemes, there is a silver lining to the incredible losses sustained by many investors in the Bernie Madoff Ponzi scheme. Due to this, the IRS wrote brand new tax laws. The most important change is that the losses are now considered business losses and not capital losses.  This is critical since it means that the losses can offset all of the other income on your tax return in the year the loss was discovered. As long as there are no possibilities of future recoveries your loss can be deducted on Form 4684, Casualty and Theft Losses. Be sure to write “Revenue Procedure 2009-20 across the top of Form 4684.

If the loss is in excess of your income this will create a Net Operating Loss (NOL)  Your NOL can be carried back 3,4 or 5 years at the taxpayers choice and/or carried forward for 20 years where you can recover past taxes paid or reduce future taxes.

-Robert S. Fineman, CPA