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2021 Tax Filing Guide for USA Scam Victims

Updated: Mar 25

Note: This guide is applicable for USA-based scam victims only.

Update: A couple of CPAs have advised us that you cannot claim both standardized and itemized deductions, which will come from the scam loss. We have since updated our example, but as again, please consult with a CPA.

 

There is a Safe-Harbor Tax Relief for Ponzi Scheme Losses¹ for USA taxpayers. A Ponzi scheme is defined as an investment fraud where the schemer uses invested money to create fake investment returns. Shazhupan / Pig-Butchering Scams can be categorized as Ponzi Schemes.


  • If you do not plan on recovering any of your losses, you can deduct 95% of your total loss on your 2021 tax returns. Doing so will reduce your taxable income during the year of your loss.

  • If you plan on recovering your losses via third-party services, you can deduct 75% of your total loss.

  • If your loss is greater than your taxable income of the year, you may carry over the remainder of your loss to your 2022 tax returns until your total loss amount is fully claimed.


This means you will get money back from the IRS via taxes you have paid in 2021. Please note: This is not the money that you lost to the scam, but it is in reality the money you paid to the IRS, that will be returned to you.


All wire transfer fees associated to the scam can be included in the deduction as well. e.g. Fees you paid while wiring to cryptocurrency exchanges and/or wiring to scammer banks.


Furthermore, according to Dontmesswithtaxes.com, Ponzi losses are claimed as a theft loss². An investor taken in by a Ponzi scheme can deduct the lost funds as a theft loss instead of as a capital loss from an investment. This is good news for investors because the capital loss deduction is limited to $3,000 per year. There is no such limit for theft losses. Ponzi scheme losses are considered losses arising from transactions entered for profit and are not subject to the limitations detailed under the Tax Cuts and Jobs Act (TCJA) of 2017. For additional information about Ponzi scheme deductions, please reference official statements from the IRS here.

 

Hypothetical Scenario:

  • You made $100,000 this year

  • You lost $200,000 due to the scam

  • 95% of $200,000 = $190,000

  • You can deduct $190,000 from your taxable income $100,000

  • $100,000 - $190,000 = -$90,000

  • With your loss being higher than your taxable income, you will owe $0 in taxes this year

  • By owing $0 in taxes, you will get a IRS refund during tax season

  • You will continue to claim this loss in upcoming year(s), until all $190,000 (95% of your loss) has been fully deducted against your taxable income


Claiming this loss does not automatically trigger an IRS audit, but please keep in mind that it may happen.


If you get audited, be prepared to show every piece of evidence you have in relation to the scam:

  • Police report

  • IC3 report

  • Bank statements of funds leaving your account

  • Screenshots of your funds in scam platform(s)

  • Screenshots of scammer profile(s)

  • Screenshots of chats/emails with scammers, fake customer service

  • Applicable only for MT4/MT5 victims: Screenshots of shell company registration info and company director info


The Silver Lining

  • This loss claim will not return all your lost funds back to you, but it will allow you to owe less to zero taxes depending on your total loss amount vs your taxable income (especially for those with over six figures in losses) and receive money back on your tax returns.

 

Recommendations

  1. Save all your evidence, organize them into neat folders, be prepared for an IRS audit, if it happens.

  2. Find an experienced CPA to handle your taxes for you, to make sure they claim your loss properly.

  3. When consulting with CPAs, mention the Ponzi scheme theft loss deduction to them, see if they know what you're talking about. If they don't seem to know what you're talking about and/or say you are limited to the $3,000 capital loss deduction, find another CPA.

 

Disclaimers

  • This guide is written by GASO members who have consulted with various senior CPAs (Certified Public Accountants) in New York.

  • GASO members are not tax experts.

  • If you have further questions about claiming this loss on your taxes, please consult individually with an experienced CPA in your state.

  • Tax consultation, planning, and filing fees will vary per individual and your respective situations.

 

Sources

  1. https://bradfordtaxinstitute.com/Content/Ponzi.aspx

  2. https://www.dontmesswithtaxes.com/2021/04/tax-loss-deduction-from-ponzi-scheme-bernie-madoffs-tax-legacy.html

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