Question: I’ve got a tax question from one of my clients. They have a loss from a ponzi scheme, but it was in an IRA. I was unable to find something on IRS website specific to this situation, but a regular investment would be treated as a theft loss. I’m thinking the IRA would also be handled the same way since it was a theft too. Have you run across anything like this?
Answer: The theft loss due to a ponzi scheme that is in an IRA is not treated the same way. The IRS will allow a loss deduction in the retirement account up to the basis in the retirement account. Basis is created when the taxpayer makes after-tax contributions to the retirement account. If there is no basis in the retirement account, the taxpayer will not be able to take a loss deduction.
For more information on IRS’ theory on this position, click here.
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