The Ponzi scheme is an investment fraud where the schemer uses invested money to create fake investment returns.

According to an article at CNBC.com, authorities uncovered 60 alleged Ponzi schemes last year involving a total of $3.25 billion in investor funds—the highest amount since around the time of the Great Recession.1

The Great Recession (2007-2009) revealed the famous Bernie Madoff Ponzi scheme and led both lawmakers and the IRS to create helpful actions for taxpayers, such as the safe harbor described in this article. Thank goodness.

And here’s more good news: the Tax Cuts and Jobs Act (TCJA), which crushed most theft losses for tax years 2018-2025, allowed the IRS tax-favored Ponzi scheme loss deduction rules to remain in place.

You might think it ridiculous that the IRS has to issue a safe harbor for deducting a theft loss from a Ponzi scheme. After all, you lose real money here. What could complicate the tax deduction?

As you will learn in this article, claiming a deduction for any theft loss requires the establishment of highly factual proof that often cannot be accomplished by taxpayers in the year they are supposed to claim the deduction.2 The IRS safe harbor overcomes these difficulties and helps ensure your tax deduction.

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