After you file

I was a part of a big ponzi scheme where $0.5 billion was lost from investors big and small. SEC got involved. Multiple lawsuits filed by SEC and private lawyer groups targeting multiple groups and individuals. Receivership (appointed to handle bankruptcy) established to sell assets for maximum return that occurred over multiple years. Ultimately 90% of loss was recovered (after lawyer's cut and receiver's expenses) with multiple years of tax filing complexity and lost opportunity cost of course. I'll answer your question from this perspective.

General Background

- First I believe tax relief for Ponzi scheme loss is still available after the sweeping TCJA. Mine occurred before TCJA but recoveries occurred after.

- IRS wants some activity to confirm was Ponzi scheme (like some of those in my case) Can't just be your word. If overall loss was large by multiple investors (including small institutional) then many lawyers will get involved. Their activities likely will meet IRS Ponzi scheme defn (like filing a lawsuit) 

- Many people will say work with a CPA and yes thats true. But know most CPAs are inexperienced with this even from big firms. Big firms might have many CPAs and some probably have handled Ponzi loss before and can offer experience. IRS guidelines leave huge amount of details ambiguous. Any CPA that haven't done it before needs to read the rules, maybe ask for clarification, and finally determine how aggressive and conservative to interpret the ambiguity within the rules  (I saw a wide range of conservative vs aggressive interpretation amongst the various investor's CPAs)

- Turbotax back in 2017+ didn't handle ponzi scheme. Just punts. Understandable given the IRS ambiguities.

With this as background, here are general steps

- First all the IRS details are here. A long read and still leaves much ambiguity when getting to real mechanics. Help for Victims of Ponzi Investment Schemes | Internal Revenue Service (irs.gov)

- IRS wants a year of discovery. This kind of starts the clock on when this loss can be part of your tax return. This is first ambiguity. Is it when you learned of the loss through a verbal coversation? When legal action has been filed?

- IRS has a safe harbor guideline. Generally, you can take 75% loss on year of discovery leaving 25% as expected recovery. Or 95% loss on year of discovery with no expected recovery. Claimed losses are above the line (pre tax dollars) so basically offsetting income in year of discovery. File form 4684 (this is where turbotax punts) Loss rolled into my Sched A back in pre TCJA 2017. Don't know what sched it rolled up to now (and any associated haircuts or limits) If claim 95% loss, is first 5% of recovery tax free? (I don't know, I took 75% path)

- In subsequent years if recoveries come in. Keep your own ledger and first 25% of recovery is tax free if taken 75% safe harbor. Beyond 25% is taxable as other income in schedule 1 (in 2021 for me)

Key ambiguity in IRS rules

- Year of discovery. I know of CPAs that loss money claim year of loss was the day they got a phone call from investment advisor hearing of the potential loss (near end of year) It was favorable for the CPA to take loss on that year so aggressively used this as discovery year. Many of us waited until lawsuit was filed the subsequent year.

- Safe Harbor rules used the word "criminal". Tax payers/CPAs wonder if this means federal or local police action. In my case, no criminal action was ever taken but civil lawsuits was sufficiently comfortable for every investor + CPA.

Recovery mechanics

- How do you project amount of recovery to decide 75% or 95% safe harbor path? This is really hard. In the beginning there is so little info to make an estimate. Generally speaking, more lawyers that gets involved = more chance of recovery as they see opportunities. Recoveries in my case came from 1) class action lawsuit to the auditor (one of the biggies) This was like 60% of the loss recovered. I think total of like $300M+ was paid by the auditor 2) selling off remaining assets from bankruptcy 3) Lawsuit to investment advisor that had conflict of interest. Recovery capped by their maximum insurance payout.

Best to huddle with other investors with loss. Cross share+gain knowledge from everyone's CPAs. Lawyers representing a group seeking to take % of recovery may talk to you for free. But the lawyers after really big $ like from auditors have no reason to talk to individual investors. Anyway, lots of things to understand and many ambiguities.

- In general, recoveries are reported to IRS on an honor system with a simple one line "other income" in sched 1. I kept good ledger that doesn't need to be filed just for records.

- If ponzi scheme is large, "recovery investors" will offer you penny on the dollar for your loss. You get rid of multiyear headache, they patiently go through the recovery mechanics and profit.

Other complexities

- If investments received "income" that was never paid out but marked to be paid later when investment matures . You could have received a 1099 and paid taxes on it. This is called phantom income and added to the loss total

- If there is financial benefit to spread out the loss over years (say heading into lower income years), there are loss carry forward rules. Wasn't my case so not as well versed.

Hope this provides a general layman guidance. Complex matter. First need to know if have enough ammo to claim Ponzi loss according to IRS defn. If you are part of bigger loss by many people, chances are probably better. I don't know the case for small individuals that were defrauded.

I'm not a CPA but use TTax to handle employment, investment, rental tax filing for all family members in 3 different states. Ponzi scheme was the most complex simply due to rules ambiguity. Its not a common high volume tax filing case so IRS has no incentive to spend time on it. I was advised to use a CPA to claim the the loss. Used TTax to handle all subsequent year recoveries with just a note "recovery for ponzi loss in year XXXX" and kept a ledger to calculate taxable portion of recovery as they came in.