By Dave Horwedel, EA, and CEO of Torchlight Tax

Yes. If you were the victim of fraud and can prove it.

As an EA, my clients can sign form 2848 IRS Power of Attorney, and I can represent them before the IRS in the same way a tax attorney can.

Under IRS rules, a fraud victim (which includes Ponzi scheme victims) is entitled to deduct their losses from their income for tax purposes.

This is good for the de-frauded investor, because the deduction for capital losses from investments is generally limited to a maximum of $3,000 dollars per year.

There is no such limit for theft losses.

The theft loss is deductible in the year the fraud is discovered, except to the extent the investor has a reasonable prospect of recovering the loss.

But what is fraud?  Fraud is “wrongful or criminal deception intended to result in financial or personal gain for the person who is defrauding another”.

This is general.  If you bought Bitcoin at its previous peak, and then sold it when it crashed to its next lowest point, and before it recovered, you might have been deceived by someone for their financial gain.

The IRS might just think you bought at the wrong time and sold too soon.

What will the IRS accept as fraud?

They will accept it if the lead figure in the investment scheme is charged (but not convicted) with criminal fraud, theft, or embezzlement, and the taxpayer must claim the theft loss on the year the criminal charges are filed.

One disclaimer here:  I have given you a summarized view of what crypto losses you can take.  This is not sufficient for you to file a tax return without a professional review by an Enrolled Agent, CPA, or tax attorney.

You may be able to prove a loss in some other way.

There may be circumstances where the IRS could disqualify such a loss as noted here.

This is complicated stuff.   For a deduction of some thousands of dollars, you can just take the limited deduction that does not require fraud.

But what about tens or hundreds of thousands of dollars of loss? Or even millions?

Time to contact a top tax professional!

Contact Torchlight Tax at 1 877-758-7797 or fill out a form here.