My brother invested all his money in a new investment which turned out to be a fraud. My brother asked me and other family members for several hundreds of thousands of dollars to help him "unfreeze" his account. It turns out the broker was a fraudster and the "new investment" was fake.
My brother declared bankruptcy last month and cannot pay anyone back. I invested $200,000 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. It was not a "gift". I feel that I am the victim of this ponzi scheme to the same extent as my brother. Can I deduct my own personal loss from my taxes under 165(c)(2)? My brother doesn't plan to seek a deduction from his personal taxes for my losses.
If I don't do it this year and wait to see if my personal investment 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.
I 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't find any guidance online.
It was a very sophisticated scam. My brother received what appeared to be real statements and actually made withdrawals. The broker had a fake website and a fake iphone app where we could track investments, gains, and withdrawals. 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.
I'm using the Desktop version of Turbotax so that I could review IRS Form 4684, which is used for theft due to ponzi schemes, and make sure it's done correctly. I'm planning to use the 95% safe harbor provision, which you can't do in the online version. 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.
This has been a catastrophe for our family, who are not wealthy or sophisticated investors. The only silver lining might be that the IRS provides my brother with a tax deduction for the stolen money, and I'm hoping the deduction extends to family members who got caught up in the scam.
