Ponzi scheme investment loss options for really BIG losses--What's best?

[Sandra370]

Sandra370

Level 2

If an individual is scammed thru a Ponzi scheme type operation, one option is to use 4684 and take the loss as theft and apply the loss to up to 95% of 2023 income, if that's the year of loss.  After reading every detail of Ponzi scheme guidance, I can NOT see where you can claim that loss for 2023 as theft and then carryover the remainder of the loss to future years as an NOL.  I noticed one contributor here noted that for 2023 the NOL would have to be the result of a natural disaster in order to do that, and I saw that in guidance, as well.  I can see that you might report part of the loss as investment loss and use the $3,000/year deduction for the next 20 years, which means you're going to call part of your loss a theft loss, and part of it an investment loss.  So I may well be misunderstanding the guidance.

How can an individual trader (who lost $450,000) in a Ponzi type scam and reports $250,000 joint marital income from day jobs--who has traded (hundreds of trades a year) stocks for 5 years but not reported gains and losses on Schedule C, but on Form 8949--recover the most amount of this loss?  She really thought she'd found a new career in cryptocurrency trading, but lost all $450,000.   As I read the guidance, it looks like all she could do is recoup $40,000 paid in tax for 2023 and maybe recoup $3,000 capitol loss year year if she reported $60,000 of the loss on 8949.    She really got scammed--not only lost all the family savings but also borrowed $200,000 and invested it and lost it entirely,  and is now repaying the loans.  I know--just incredible.  But it happened to many, many folks.    Can you guys help out here?  I'm a CPA, I've consulted a much better CPA , but neither of us has ever dealt with this type of situation before.  What's the best this poor woman can do when she files her 2023 return before the extension is up, and have a chance that it will hold up under IRS scrutiny?   As her friend and contact for this, I don't want to cause her to lose the opportunity to at least recoup 2023 paid in taxes or miss any opportunity to carry this forward.   Help would be very much appreciated!  I'm just going in circles now.  

[Mike9241]

I'm not sure where you saw splitting the loss between investment and ponzi. usually in a ponzi every $ sent is lost immediately and there are no real trades despite what confirms might show.   if you want to do the best for her, then use the services of a tax attorney or CPA familiar with Ponzi reporting.  costly but then there is someone that can represent her and if needed defend the position taken if they split the loss. The burden of proof that part of the loss was from trading is on the taxpayer not the iRS 

[Sandra370]

You are right on all counts.  I was drawing a similarity between investors writing off the worthless copper mine stocks people were buying back when.  Fact is, it was most likely worthless when purchased--the buyer just didn't know it, so held it for years before giving up. For years before investing in this pig butchering scam, this woman was a fairly astute trader.  She  traded on various exchanges frequently and profitably and usually added $20K or so to her annual income.  This was really out of character. Thanks for the input.  I've loaned her enough to pay off the highest interest loans, but that's about all I can do.  I guess she can go the safe harbor route and at least get her $40K paid in taxes for 2023 back, and that's about it.  That's at least easy, and she has all the documentation and meets the requirements.