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ForEx Scam losses - how to treat


ByramCPA

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Hello,

I have a Client who fell for a ForEx currency trading scam, to the tune of many tens of thousands of dollars, on MetaTrader5. 

As we all know, Casualty and Theft losses have not been a thing from 2017 forward.

However, Client DID enter this scam as an investment. Client has documentation of how much he put into the scam and exactly when, and the exact date when the program traders forced a sale on his account and wiped him out. Could his massive losses be treated as investment losses, and allowed to offset gains plus $3,000 a year in lowered income, for many years to come?  

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2 hours ago, cbslee said:

If your client has documentation of his basis and the sale of his investment, then it sounds like a capital loss.

Were 1099s filed with the IRS?

 

This has just happened. Client has well documented what he put in and his date of loss. I suspect the scammers will not send a 1099, however.

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On 6/30/2022 at 7:26 PM, ByramCPA said:

Could his massive losses be treated as investment losses, and allowed to offset gains plus $3,000 a year in lowered income, for many years to come?  

It is a gray area and depends on facts and circumstances.  If the client went through a broker it would help his case.

Take a look at RR 2009-9.

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On 6/30/2022 at 7:26 PM, ByramCPA said:

As we all know, Casualty and Theft losses have not been a thing from 2017 forward

However, as explained in RR 2009-9. Ponzi scheme type of losses are still deductible  since they are not subject to the disallowance of sec 165(h)(5)(A) for the years 2018-2025.

Personal theft losses which are disallowed fall under sect 165(c)(3).

Since Ponzi losses result from a profit motive transaction (other than from a trade or business) they fall under sect 165(C)(2) and are not subject to the limitations of sect 165(h) so they are still deductible as an itemized deduction.

You should also be aware of the safe harbor under Rev Proc 2009-20.

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Thank you for the detail, DANRVAN! 😊

Client ("the mark") was following buy and sell instructions of two other "investor friends" (who were also leading him on and enticing him to put more money into his Foreign Currency Exchange Account) in a practice the internet apparently refers to as "Fattening and then Butchering the Pig" (gee, how nice the scammers from Asia are!) But Client does have detail of his MetaTrader5 account, and of his buying and selling and contribution history. ForEx, is short for Foreign Exchange or Foreign Currency Trading.

This just happened the other day to Client, so this would be an issue on the 2022 income tax return.

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On 6/30/2022 at 7:26 PM, ByramCPA said:

. Client has documentation of how much he put into the scam and exactly when, and the exact date when the program traders forced a sale on his account and wiped him out.

It is not clear to me how this scam works.  Did the "traders" remain anonymous and pulled his money out with out a trace of where it went to?

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12 hours ago, DANRVAN said:

It is not clear to me how this scam works.  Did the "traders" remain anonymous and pulled his money out with out a trace of where it went to?

Essentially yes. Trading program forced a loss sale to which Client never agreed, wiping out all his investment and then some, and then Client realized he had been scammed.

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On 7/6/2022 at 11:30 AM, ByramCPA said:

Trading program forced a loss sale to which Client never agreed, wiping out all his investment

Sounds like a theft loss since scammers took possession of his funds through a forced sale.   Capital loss does not sound right since it did not result from a change in market value.

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