Claiming Loss on a Ponzi Scheme

[Terry D EA]

New client and victim of the ZeekRewards Ponzi-Scheme, lost 10,000.00. Previous preparer was only listing 5k loss at a time which the amount allowable is 3K. This client has received some funds back from the SEC. My take is they should claim a loss until the loss is absorbed or until they receive enough funds from the SEC to cover the loss and any payments received above the loss amount would be taxable. Just to verify, this type of investment loss is recorded on Sch D, correct?

 

[Max W]

There are special rules for handling Ponzi Schemes and one of them is it has to be determined that it is one and not just an investment gone sour.

As I recall, from one I did a few years ago, court records had to be provided where it was shown to be a Ponzi scheme.

Also, I do not think that Sch D was used, Sch A was.  

You will have to research it, because it is handled differently than other investment losses.

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[Terry D EA]

Thanks, it is definitely a Ponzi Scheme. I have researched the ZeekRewards and it is all over the internet. My problem is the previous preparer has used Sch D and did not use the entire loss amount. This method of reporting I am not 100% comfortable with. I will research further. If anyone else has any experience with this, please reply.

[Terry D EA]

Wow, after some digging, I found two revenue rulings regarding losses and Ponzi schemes. This is definitely not one for the faint of heart. The situation now is the previous preparer did this completely wrong as I suspected and my initial take was wrong. It looks like an amendment and a whole lot of other paperwork to substantiate the loss. One of the rulings is addressing a safe harbor which I am not digesting. Anyone with any other experience I would certainly appreciate any help or advice.