Can family members who gave money to a relative to invest in a ponzi scheme deduct their lost investment from their taxes under 165(c)(2)?

Travis68 — Wed, 12 Mar 2025 19:06:47 GMT

My brother sold all of his existing stock and used a broker to invest all his money in a new investment. It turns out the broker was a fraudster and the "new investment" was fake. My brother received what appeared to be real statements and actually made withdrawals. The broker had a website and an iphone app where my brother could track investments, gains, and withdrawals. It was all very sophisticated. Last year (2024) he decided to sell all of his new investment. At that time, the fraudster/broker told him that his account was frozen and he would need to invest more money to "unfreeze" his account. In late 2024, several family members gave my brother money to invest with the fraudster to unfreeze his account. Last fall, he learned that the "broker" was fake and that all of the investments were fraudulent. He had put all of his money into this scheme, including several hundreds of thousands of dollars of money from family. He did research and discovered he owned no stock and the broker absconded with all of his money and our family's money, and now he's completely ruined. The fraudster has disappeared and we have no hope of getting any money back. He reported the scam to the FBI, the Colorado Bureau of Investigation, the FTC, and so on. Apparently the FBI is aware of this fraudster and has had other reports from other victims about the same person. There is an active criminal investigation. My brother declared bankruptcy this year and cannot pay anyone back. I gave $200,000 to invest to help him "unfreeze" his account, and now I have no hope of getting any of my investment back from either my brother who is bankrupt or the broker who is gone. For me, it was clearly a financial transaction because I invested in the hope of getting my money back plus interest. I feel that I am the victim of this ponzi scheme to the same extent as my brother. Can I deduct the loss from my taxes under 165(c)(2)? If I don't do it this year and wait to see if this loss is deemed by the IRS to be deductible, I'm worried that under 165(e) I can only take the deduction in the year that I learned of it. If I wait to see if my losses are legitimately deductible, I may lose the chance to deduct them. I have read IRS Rev. Proc. 2009-20 and Rev. Proc. 2009-09 which address tax deductions for ponzi schemes, but they don't seem to address the situation where a family member provides additional investments in the ponzi scheme. Sadly, it seems like a fairly common scenario, and I'm surprised I can find no guidance online. I had a phone call with a tax professional from Turbotax and was told that I could claim it as a theft loss and deduct it, and she guided me through the Turbotax process, which allowed me to take the deduction. But I'm concerned that I might be missing something and can't find any online guidance. Professional tax accountants don't seem familiar with this scenario either. Should I go ahead and take my chances with the IRS?

Re: Can family members who gave money to a relative to invest in a ponzi scheme deduct their lost investment from their taxes under 165(c)(2)?

Bsch4477 — Wed, 12 Mar 2025 20:44:21 GMT

Yes, your brother might get some tax relief. See here.
https://www.irs.gov/newsroom/help-for-victims-of-ponzi-investment-schemes

Unless you have documentation that your loss was loan, the money you gave to your brother would be considered a gift and so not deductible. Information on recovering a bad debt is here.
https://www.irs.gov/taxtopics/tc453#:~:text=To%20show%20that%20a%20debt,year%20the%20debt%20becomes%20worthless.

Re: Can family members who gave money to a relative to invest in a ponzi scheme deduct their lost investment from their taxes under 165(c)(2)?

Travis68 — Wed, 12 Mar 2025 21:03:07 GMT

Thanks for your response. To clarify, the money was not a gift. It was a loan that was to be invested and repaid with interest and I have documentation. I have no hope of recovery because he declared bankruptcy and discharged the loan, and the money I gave him was invested in the ponzi scheme and totally lost. I feel that I am a victim of the ponzi scheme to the same extent as he was. The rules aren't really clear about whether I can deduct my own losses, but I think clearly my brother is allowed to do that.

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Can family members who gave money to a relative to invest in a ponzi scheme deduct their lost investment from their taxes under 165(c)(2)?

Re: Can family members who gave money to a relative to invest in a ponzi scheme deduct their lost investment from their taxes under 165(c)(2)?

Re: Can family members who gave money to a relative to invest in a ponzi scheme deduct their lost investment from their taxes under 165(c)(2)?