You may be able to use Section C of Form 4684 if your loss is due to a fraudulent investment arrangement, and you are a qualified investor.
To be considered a fraudulent investment arrangement the lead figure of the fraud:
• Must have been charged under state or federal law with the commission of fraud, embezzlement or a similar crime that meets the definition of theft,
• Or was the subject of a state or federal criminal complaint (not withdrawn or dismissed) alleging the commission of a crime,
• Or a receiver or trustee was appointed with respect to the arrangement or assets of the arrangement were frozen.
The qualified investor must be:
• A US person that,
• Did not have actual knowledge of the fraudulent nature of the investment arrangement prior to it becoming known to the general public; and
• The specified fraudulent arrangement is not a tax shelter, and
• That transferred cash or property to a specified fraudulent arrangement.
If all of the above are true, you can use Section C of Form 4684 to claim your loss.
If the loss doesn't meet the conditions above, you may be able to deduct a nonbusiness bad debt.
A debt becomes worthless when the surrounding facts and circumstances indicate there's no reasonable expectation that the debt will be repaid.
To show that a debt is worthless, you must establish that you've taken reasonable steps to collect the debt. It's not necessary to go to court if you can show that a judgment from the court would be uncollectible.
You may take the deduction only in the year the debt becomes worthless. You don't have to wait until a debt is due to determine that it's worthless.
The nonbusiness bad debt is recorded on the tax return as a short term capital loss, so it offsets capital gain income and up to $3000 can be deducted each year until the entire amount is used.
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