Yes, you do have to report the income you earned even though it was stolen from you. The IRS defines a theft as follows:
"A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. The amount of your theft loss is generally the adjusted basis of your property because the fair market value of your property immediately after the theft is considered to be zero."
However, losses from thefts (and casualty losses) are an itemized expense, meaning you include them on Schedule A of your return. If your theft loss, plus other items that you can itemize, are not greater than your standard deduction, you won't be able to include your loss on your return. The IRS states the following with regard to how to report you theft loss:
"Individuals may claim their casualty and theft losses as an itemized deduction on Schedule A (Form 1040), Itemized Deductions (or Schedule A (Form 1040-NR) PDF, if you're a nonresident alien). For property held by you for personal use, you must subtract $100 from each casualty or theft event that occurred during the year after you've subtracted any salvage value and any insurance or other reimbursement. Then add up all those amounts and subtract 10% of your adjusted gross income from that total to calculate your allowable casualty and theft losses for the year."
Your question also raises the issue of whether your loss might have involved a Ponzi scheme. TurboTax does not support tax losses from investment fraud. In the section on casualties and thefts, under Deduction and Credits, TurboTax will ask whether you were a victim of a Ponzi scheme. A "yes" answer will produce the following message:
"Ponzi schemes and other fraudulent investment arrangements
We're sorry to hear about this loss. Unfortunately, this type of loss can be particularly complicated for tax purposes, and in many situations the tax treatment depends on factual determinations best handled by an attorney. TurboTax does not support tax losses from investment fraud. We recommend consulting a tax professional if you've experienced this situation."
The above quoted IRS material was obtained from the IRS website which you can find using the link below.
Topic 515: Casualty, Disaster and Theft Losses
@Anonymous
**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
