Ponzi schemes are terrible, but they can often seem like things that happen to other people. We don’t worry about them because we think surely we’d never fall victim to this type of predatory business practice. But recently, two Ponzi schemes hit close to home and affected people in Rea’s local communities. Approximately 2,698 people and entities were affected by losses sustained from investments held by A&M Investments in Sugarcreek, OH, and another 5,200 were affected by Fair Finance. As repayments are being made from the ensuing bankruptcy case with A&M Investments, people are now wondering two things: how do I report the money I lost, and do I need to report these repayments on my tax return?
Reporting Theft Loss
Since criminal fraud charges, as well as civil charges, were brought in the A&M Investments case, conned investors are allowed to deduct their loss as an ordinary loss instead of a capital loss. This is important because capital losses can only offset capital gains, and are limited to $3,000 of loss per year after that. The amount not used is carried forward until it is completely used, but for some individuals, this could take decades. On the other hand, ordinary losses can be used against all other income, and can be taken all in one year.
You are allowed to take a theft loss deduction in one of two ways. The first is to deduct a portion of the loss in the year of discovery; this is contingent on the fact that there isn’t a reasonable prospect of recovering any of the stolen funds. For purposes of taking a theft loss, the discovery date is the date an indictment for fraud is handed down in a criminal proceeding. For Fair Finance losses, this date was March 16, 2011.
The second option is to wait until all available funds have been recovered, and then report the full amount of loss. In deciding which method to use, you will need to take into consideration whether you expect to recover a portion of your investment, or whether the full amount of your investment will be lost. Talk to your Rea advisor about which option will be best for your situation.
Reporting Settlement Payments as Income
If you do not claim a theft loss on your tax return in the year of discovery, any repayments from a bankruptcy settlement in later years will not be taxable. They are considered to be a return of the funds you initially invested with the fraudulent company. If you did claim a theft loss on your return in the year of discovery, you may have to report any recovery payments as income on your tax returns.
Help for Victims of Fraud
If you are a victim of this kind of fraud, the theft is only the first of a series of difficulties that you’re likely to face. The legal and tax consequence of the situation can seem almost impossible to unwind. Don’t try to untangle the web of complicated rules on your own; contact Rea & Associates. Our Ohio tax consultants will help you analyze your situation and develop a clear path to move forward. This type of loss can be devastating, but you don’t need to face it alone.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article