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Marvin,EA, Enrolled Agent
Category: Tax
Satisfied Customers: 1672
Experience:  Enrolled to Represent Taxpayers Before The IRS
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I am a victim of an investment Ponzi scheme. The ...

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I am a victim of an investment Ponzi scheme. The individual running the scheme has been arrested May, 2007 and is in jail for securities fraud awaiting trial. The instruments used were promissory notes. Investigators indicate there are no monies to be found. The definition of theft in IRS Pub. 547 is "The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law.".

Can I treat this loss as a theft and deduct it as on my 1040 Sch. A? If so, can I take it this year or do I wait for a conviction?
Hello and thank you for using Just Answer. Since it was a investment losses, you can deduct the amount on Form Sch. D, Capital Gains and Losses. If you have no other Sch.D losses, you will be only to deduct $3,000 per year until the amount is used up. Keep the promissory notes with your 2007 tax return.
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Customer: replied 9 years ago.
I understand I can do the Sch. D thing but I really want to treat it as a theft and it seems to fall into the theft definition. Are there actual cases regarding this?

Investment in stock based upon false or illegal representations. [ Vietzke, 37 TC 504 (1961)] I would used this case and file the losses on Sch. A. with the $100 rule.

Customer: replied 9 years ago.
Very good. Thank you.