The FTX fraud was a Ponzi scheme – and losses are deductible from a taxpayer’s ordinary income

The FTX fraud was a Ponzi scheme and losses from Ponzi schemes are acknowledged by the I.R.S to be “theft losses”. They are deductible from a taxpayer’s ordinary income.

The theft loss tax deduction is an extremely valuable tax deduction and for many victims of the FTX fraud the deduction will have a cash value equal to 35% or more depending upon state and city income taxes. Investors who are subject to federal, state, and city income tax may find that their recovery from the tax loss is equal to almost 50% of their theft loss.

There are several methods of tax recovery that are available to Ponzi scheme victims.

However, each of these potential options of recovery have their limitations, restrictions, and strict requirements that must be met if one is to take advantage of the maximum tax benefits from the FTX theft.

The two most critical mistakes that result in the loss of the maximum advantage of these tax deductions seem to be:

1. the failure to deduct the tax losses in the proper year, and
2. to enter into settlements that may turn the ordinary theft loss into a capital loss that will be of much less value. The latter can occur for example, if an investor were to accept shares of stock as part of a settlement and then those shares of stock (a capital asset) lost all of their value.

The benefits and the traps make it important to tax plan properly to maximize the tax losses.

It is critical that tax advisors and litigation counsel work closely together in order to not foreclose any of the available options for ponzi scheme victims to make use of tax losses. Hopefully, professionals working together will avoid costly mistakes.

In considering the various options of recovery available for tax losses some fundamental knowledge of the law is important. In FTX Ponzi REPORT NO.1 we cover these tax fundamentals into the following order.

• The Amount of the Theft Loss Deduction
• The Timing of the Theft Loss Deduction
• Tax Loss Carry Forwards
• Deduction in the Year of Loss
• Deduction in Years Other Than the Year of Loss
• Other Sources of Tax Recovery
• Payments Received as a Return of Capital – Not Income
• “Phantom Income” Tax Treatment
• Tax Planning and the Practical Effects of the Tax Rules – Mistakes to Avoid.

REPORT No. 1: FTX created huge losses for many – similar to Madoff Ponzi scheme

Contact Richard S. Lehman, U.S. Tax Attorney:

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