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.Tax Breaks for Ponzi-Scheme Victims (via Consumerist)
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.
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