Paid taxes on short-term gains reported on K-1 that turned out to be fictitious

[User1218]

I invested $10k in a company in 2018. The 2018 K-1 reported short-term capitals gains of $23k which I paid taxes on with my 2018 return. In late 2019 it was discovered that this company I invested in was a scam and that the profits reported on the 2018 K-1 were made up. There were federal indictments and two of the partners are in jail now. What do I need to do in order to get a refund for the taxes I paid on the fake gains of $23k? Do I amend 2018? If so, how do I indicate the K-1 was not correct since I would assume the IRS will match my K-1 to my tax return and think I owe the taxes?

I was not issued a K-1 for 2019 and am under the impression I never will be. Do I need to do anything on my 2019 return or should I just omit anything related to this K-1? 

Any help would be much appreciated!!

[DavidS127]

More information may help resolve your issue.  For example, after your initial $10K investment, did you receive any cash back for the $23K gain that was reported?

[User1218]

No, I have never received a dime from this investment nor did I get my $10k back. The gains that were reported were all just made up numbers. Here's the latest on the case if that helps answer the question.

https://coingeek.com/cftc-requests-entry-of-default-against-33-million-q3-scam/

[DavidS127]

You can amend your 2018 tax return to delete the K-1.  Along with your amended tax return (which can only be printed and mailed) you can include the support for your claim that the K-1 is not legitimate.

Your $10K investment is a loss from investment fraud.  TurboTax does not support tax losses from investment fraud.  The tax treatment (e.g., theft vs. capital loss) depends on factual determinations best handled by an attorney. I recommend consulting a tax professional to work through the specifics of your situation.

Note that there is special IRS guidance for victims of Ponzi investment schemes.  Even if your situation does not meet the definition of a Ponzi scheme, the IRS guidance on Ponzi schemes at this link (including the associated Revenue Procedures) may provide support for how you treat the $10K investment loss for tax purposes.