Form 4684

[PH24]

I was scammed out of money last year, and want to mitigate the loss when I file my taxes.  Can I deduct this loss on Form 4684 Section C with TurboTax?

[JulieS]

It depends on the nature of the loss and when it occurred. 

From the instructions for Form 4684:

"For tax years 2018 through 2025, if  you are an individual, casualty and theft losses of personal-use property are deductible only if the losses are attributable to a federally declared disaster (federal casualty loss)."

This means it isn't likely that you can deduct the loss on Form 4684, unless you also had casualty gains during the same year (not common).

It is possible that you may be able to deduct your loss as a nonbusiness bad debt, or a loss on deposits, depending on the nature of the loss. 

Click here to learn more.

[PH24]

Thank you Julie.  Do you have any more specifics on how I can deduct this as a nonbusiness bad debt, or a loss on deposits?  Is that something a Turbotax expert could guide me through while filing?

[JulieS]

Yes, a tax expert could guide you through that if you request help from within the program. 

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• Or was the subject of a state or federal criminal complaint (not withdrawn or dismissed) alleging the commission of a crime,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.