Under the IRS rules, an investor in a Ponzi scheme is entitled to deduct his or her losses as a theft loss, instead of a capital loss from an investment. This is good for the investors because the deduction for capital losses from investments is normally limited to a maximum of $3,000 per year. There is no such limit for theft losses. Theft Losses Internal Revenue Code section 165(a) allows a deduction for a loss sustained in the tax year and not compensated for by insurance or otherwise. Loss is sustained in year in which it occurs.
- 2009-9 the IRS ruled that taxpayer-investors that are victims of fraud or embezzlement schemes may take a theft loss. 2009-20 outlines safe-harbor rules for qualified investors with (specifically) Ponzi-scheme losses beginning for tax year 2008.
- Similar to casualty losses above, post-2017 after the Tax Cuts and Jobs Act was passed, theft losses are no longer deductible on Form 4684. If your cryptocurrency was stolen and classifies as a theft loss, it's unlikely that you can write this off. You can read more about the details of.
(a)Allowance of deduction.
(1) Except as otherwise provided in paragraphs (b) and (c) of this section, any loss arising from theft is allowable as a deduction under section 165(a) for the taxable year in which the loss is sustained. See section 165(c)(3).
- 2009-9 the IRS ruled that taxpayer-investors that are victims of fraud or embezzlement schemes may take a theft loss. 2009-20 outlines safe-harbor rules for qualified investors with (specifically) Ponzi-scheme losses beginning for tax year 2008.
- Similar to casualty losses above, post-2017 after the Tax Cuts and Jobs Act was passed, theft losses are no longer deductible on Form 4684. If your cryptocurrency was stolen and classifies as a theft loss, it's unlikely that you can write this off. You can read more about the details of.
(a)Allowance of deduction.
(1) Except as otherwise provided in paragraphs (b) and (c) of this section, any loss arising from theft is allowable as a deduction under section 165(a) for the taxable year in which the loss is sustained. See section 165(c)(3).
(2) A loss arising from theft shall be treated under section 165(a) as sustained during the taxable year in which the taxpayer discovers the loss. See section 165(e). Thus, a theft loss is not deductible under section 165(a) for the taxable year in which the theft actually occurs unless that is also the year in which the taxpayer discovers the loss. However, if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, see paragraph (d) of § 1.165-1.
(3) The same theft loss shall not be taken into account both in computing a tax under chapter 1, relating to the income tax, or chapter 2, relating to additional income taxes, of the Internal Revenue Code of 1939 and in computing the income tax under the Internal Revenue Code of 1954. See section 7852(c), relating to items not to be twice deducted from income.
(b)Loss sustained by an estate. A theft loss of property not connected with a trade or business and not incurred in any transaction entered into for profit which is discovered during the settlement of an estate, even though the theft actually occurred during a taxable year of the decedent, shall be allowed as a deduction under sections 165(a) and 641(b) in computing the taxable income of the estate if the loss has not been allowed under section 2054 in computing the taxable estate of the decedent and if the statement has been filed in accordance with § 1.642(g)-1. See section 165(c)(3). For purposes of determining the year of deduction, see paragraph (a)(2) of this section.
(c)Amount deductible. The amount deductible under this section in respect of a theft loss shall be determined consistently with the manner prescribed in § 1.165-7 for determining the amount of casualty loss allowable as a deduction under section 165(a). In applying the provisions of paragraph (b) of § 1.165-7 for this purpose, the fair market value of the property immediately after the theft shall be considered to be zero. In the case of a loss sustained after December 31, 1963, in a taxable year ending after such date, in respect of property not used in a trade or business or for income producing purposes, the amount deductible shall be limited to that portion of the loss which is in excess of $100. For rules applicable in applying the $100 limitation, see paragraph (b)(4) of § 1.165-7. For other rules relating to the treatment of deductible theft losses, see § 1.1231-1, relating to the involuntary conversion of property.
(d)Definition. For purposes of this section the term 'theft' shall be deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery.
(e)Application to inventories. This section does not apply to a theft loss reflected in the inventories of the taxpayer. For provisions relating to inventories, see section 471 and the regulations thereunder.
(f)Example. The application of this section may be illustrated by the following example:
| Value of property immediately before theft | $3,500 |
|---|---|
| Less: Value of property immediately after the theft | 0 |
| Balance | 3,500 |
| Loss to be taken into account for purposes of section 165(a): ($3,500 but not to exceed adjusted basis of $4,000 at time of theft) | $3,500 |
| Less: Insurance received in 1963 | 2,000 |
| Deduction allowable for 1963 | 1,500 |
You recently inquired about employee fraud and embezzlement issues, and how the tax law can help you if your business has suffered losses from employee-related thefts. There are a number of ways that employees may steal from a company. Four common types of fraud include embezzlement, theft of inventory, creating fictitious vendors, and padding expense accounts. In fact, according to the Association of Certified Fraud Examiners (ACFE), the current economic climate has led to an increase in employee fraud. Moreover, ACFE found that the fraud most expected to increase in the workplace over the next 12 months is embezzlement.
This letter is intended to provide you with a basic understanding of how the tax law can help your business recover from losses incurred as the result of employee fraud or embezzlement. This is a very complex area of tax law; please do not hesitate to contact us if you have any questions.
Section 165 of the Tax Code provides a deduction for a loss due to theft, such as the above mentioned types of fraud, and which has not been compensated for by insurance or otherwise reimbursed. For tax purposes, 'theft' involves the unlawful taking and removing of money or property with the intent to deprive the owner of it, and includes embezzlement by employees. Therefore, an employer is allowed a deduction of in calculating their taxable income for the year in which the money was embezzled by the employee in that year.
A deduction for theft loss, such as from embezzlement or fraud, can only be taken in the year that you discover the loss. Thus, a loss arising from theft is not deductible in the tax year in which the theft actually occurred, unless that is also the year in which the taxpayer discovers the loss.
A loss is not deductible if you have a claim for reimbursement with a reasonable prospect of recovery. The loss cannot be deducted until it can be determined with reasonable certainty whether or not reimbursement will be received – for instance, on settlement, adjudication, or abandonment of the claim. This may affect all or part of your loss deduction.
Theft losses, such as from employee embezzlement, are generally reported on Form 4684, Casualties and Thefts, in the year that you have discovered the theft losses. A loss due to an employee's embezzlement will be deducted as a theft loss and generally listed in the 'Other Expenses' category on the tax return.
Irs Loss From Theft Charges
A special rule applies for losses of inventory. In general, there are two ways you can deduct theft losses of inventory. You can either:
1. Deduct the inventory-related loss through the increase in the cost of goods sold by adding the amount of your loss to the 'cost of goods sold' that you normally report on Schedule C, Profit or Loss From Business (Sole Proprietorship), when you figure your business losses and profits. If you use this method, you cannot also claim casualty or theft loss. Moreover, if you receive any reimbursement for the loss, you have to include that amount in your gross income; or
2. Deduct the loss separately by removing the damaged inventory from the Schedule C 'cost of goods sold' by making a downward adjustment to opening inventory or purchases. Reduce the loss by any reimbursement you received, and so you do not include the reimbursement in gross income.
Irs Theft Loss Deduction
It is imperative that you maintain records that will prove your deduction for the theft. To prove a theft loss, it is important to have documents showing.
- When you discovered that property was missing;
- That your property was in fact stolen;
- That you are the owner of the stolen property; and
- Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery.
Theft Loss Deduction Rules
If you receive insurance or another type of reimbursement, you need to subtract the reimbursement when computing your loss. You do not have a casualty or theft loss to the extent you are reimbursed. As mentioned above, you cannot deduct any amount for losses where a reasonable prospect of recovery exists. You must wait until it can be established with reasonable certainty whether you will receive reimbursement. If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. You must reduce your loss even if payment is not received until a later tax year.
Schoenefeld de. If you have any questions about the tax implications of business losses due to employee fraud, embezzlement or theft, and whether certain expenses qualify, please contact our office at your convenience.
