IRS Will Treat Investment Theft Losses As Ordinary Losses

Wednesday, June 24, 2009, 10:39 AM | Leave Comment

If you have lost money by giving it to a schmuck to invest it for you, help may be on the way especially if you are a victim of the biggest schmuck of them all known as Bernie Madoff.

The IRS of the good old U.S. of A. has announced it will treat investment theft losses as the more favorable ordinary losses. Basically, such losses occur when your money is never actually used for the intended purpose of acquiring investment assets.

Instead, the money is hijacked by the perpetrator of a fraud, better known as a schmuck.

The classic example is the so-called Ponzi scheme where money collected from later investors is used to cover income distributions and withdrawals paid to earlier investors without any investments ever actually being made.

What’s Ordinary losses compared to Capital losses

  • Capital losses
    You can only deduct Capital losses to the extent of capital gains for the year, plus another $3,000 ($1,500 if you use married filing separate status.) Any leftover capital losses get carried forward to the following year, and the same limitation rule applies all over again. As a result, it can take years to fully deduct big capital losses.
  • Ordinary losses
    Ordinary losses can be written off against any type of income (salary, interest, dividends, capital gains, self-employment income and such.) If you have a big ordinary loss that exceeds what you can deduct in the loss year, the excess can potentially create a net operating loss.

    You can carry a net operating loss back to previous years and recover taxes you paid earlier, or you can carry it forward to shelter income in future years, which will be especially helpful if tax rates go up.

In a Nutshell
There will always be schmucks among us from time to time. This time the IRS will come to the rescue. Ordinary loss treatment takes some of the sting out of Ponzi scheme losses.

The sad truth is, Ponzi losses are more widespread than you might think. We will watch what comes of another schmuck – oops alleged schmuck – Mr. Stanford’s arrest.

One thing I have learned over the years:

If you played straight, may IRS bless you.
If you played a crook, may God bless you.

Always remember!
Al Capone was not sent to jail by Elliot Ness
Al Capone was sent to jail by IRS.

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