If you’re the victim of an online fraud or Ponzi scheme, in addition to recovering funds, one of the most common questions has to do with taxes. Can you deduct losses from an online scam from your taxes?
The IRS has a very specific procedure for determining losses from fraud according to CFR title 26 section 1.165-8. If the loss is from criminal fraud or embezzlement, that is subject to personal loss limits or the limits of itemized deductions. You’ll have to go through a process determining what year the loss happened and more importantly if the scam or a Ponzi scheme was already established as a loss. Think back to the Bernie Madoff case in 2008, these rules by the IRS weren’t established until 2009, so the victims had to wait for compensation. If the fraudster that scammed you hasn’t been arrested or charged, you may have to wait until this happens before being able to classify the loss as theft. Until the perpetrator is charged or the scam has been brought to light, it may still be an established and profitable ongoing enterprise.
So if you have financial statements, they may still be showing your profit which could be a determining factor on your taxes. And it might not seem fair because you can’t access that money. If you put in $10,000 and your account compounded to $100,000, you might have $90,000 on paper that you have to pay taxes on, whether or not that money is in your account. And if the perpetrator isn’t caught, you may not be able to show that as a loss until that point in time comes.
Keep in mind that we’re not attorneys or tax accountants, if you’ve had a loss due to fraud, check with your accountant or attorney before filing to learn whether or not you can deduct these losses. In some cases, you may have to file an extension until the fraud is actually prosecuted. In the meantime, continue your asset recovery process but also consider what the tax implications will be for future filing.
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