Taxpayers and their preparers have very good reason to want to categorize losses as theft losses rather than investment losses. Theft losses are treated as ordinary losses and are deductible in the year they were incurred. A theft loss is deductible to the extent it exceeds $100 per loss event and to the extent it exceeds 10% of the taxpayer’s adjusted gross income, while investment losses are treated as capital losses and are generally limited to the amount of capital gains plus $3,000.
Therefore, it’s not surprising that the Treasury Inspector General for Tax Administration has found that Many Investment Theft Loss Deductions Appear to Be Erroneous:
Federal law … provides taxpayers with tax relief for investment theft losses. The IRS estimates that more than 19,200 taxpayers filed Tax Year 2008 tax returns claiming a combined total of more than $8 billion in property income casualty and theft deductions.
Our review identified that taxpayers may be erroneously claiming investment theft loss deductions. … TIGTA estimates that 1,788 (82 percent) of 2,177 taxpayers may have erroneously claimed deductions totaling more than $697 million, resulting in revenue losses totaling approximately $41 million.
The potential revenue loss estimate is conservative in that it only represents electronically filed tax returns for one year.
Because of slew of recent high profile Ponzi schemes involving thousands of taxpayers, the IRS has issued guidance on the tax aspects of losses from a Ponzi scheme and created a safe harbor under which investors can claim theft loss deductions.
For more information about the new theft loss rules, call our attorneys at our office.