Deduct your Ponzi scheme losses

The IRS will let you deduct your losses from Ponzi scheme ripoffs. No word on whether losses due to the wire, the pigeon drop, advance payment or three card monte are allowable, but I'm gonna claim 'em anyway.
The IRS has announced it will allow favorable ordinary loss treatment for investment theft losses. Basically, such losses occur when your money is never actually used for the intended purpose of acquiring investment assets.

Instead, the money is hijacked by the perpetrator of a fraud. The classic example is the so-called Ponzi scheme where money collected from later "investors" is used to cover "income distributions" and "withdrawals" paid to earlier "investors" without any investments ever actually being made.

Taxpayer-friendly ordinary loss treatment takes some of the sting out of Ponzi scheme losses. Unfortunately, however, there are plenty of victims who can benefit from the IRS's enlightened attitude. Not only did Bernie Madoff lose some $65 billion of investors' money, but other similar frauds have since come to light. The sad truth is, Ponzi losses are more widespread than you might think.

Tax Breaks for Ponzi-Scheme Victims (via Consumerist)


  1. If Mr Ponzi had a nickel for every time someone used his scam, how would that be taxed?

  2. I’m going to go ahead and ask whether that includes FICA taxes. At least investment in Madoff’s schemes was voluntary.

  3. Cool. A new can of worms just opened up and accountants all over are rejoicing.

    So, who qualifies a failed investment as Ponzi Scheme? SEC can’t even detect Ponzi Schemes when it hits them in the face 9 times! Do you have to have invested in it directly, or could you get the deductions if you lost money on an investment that in turn invested in the Ponzi Scheme? How long a chain can you draw on? How large must a Ponzi Scheme be before it qualifies for IRS deduction blessing?

    I could certainly round up some hobos around town to set up a fake company and run a fake Ponzi Scheme (haha!) where no money exchanges hands except for the hobos getting some food and shelter, but ultimately ending up in courts and possibly prison (more food and shelter). Some rich folks get to deduct a chunk of their income for tax purposes, and accountants all over rejoice again!

  4. Ah….

    In this case, Canada is far more Libertarian than the U.S. In Canada, you get to live with your criminal losses, not get the government to let you deduct them.

    Since Madoff never actually invested the money, in Canada you can’t deduct this as an investment loss. It’s treated like you gifted the money to Madoff to do with as he pleased.

    I expect that Canadians are free to sue him to get their money back, though.

  5. @2: Dude!! We totally have the same accountant! Man, what a small world.. The Internet is so cool.

  6. If this is like the way other losses are managed, you will only be able to write off around $3K per year.

  7. could Americans deduct all their foreign policy losses from the Bush Tragedy as reflected by their personal share of the national debt?

  8. government is a Ponzi scheme, the neat trick of this administration is fleecing the masses & leaving them with a smile on their faces

  9. #5

    As a tax guy with clients who have been the victims on Ponzi Schemes (though not Madoff) the first qualifier is that there needs to be a crinimal investigation that denotes it AS a Ponzi scheme. You generally need to provide documentation of the FBI case # with your submission of claim.

  10. The entire monetary system is a ponzi scheme, if you squint a bit and hold your head right. (Where does the money come from to pay the interest on your loan? In the end, someone has to take out a loan…)

    With luck your IRS haven’t defined “ponzi scheme” very well, and you can all pay the interest off with that for a while…

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