You Make the Call - April 30, 2026

Question: In 2025, John Miller invested $100,000 with a financial advisor who was later discovered to be operating a Ponzi scheme. By the end of 2025, the scheme collapsed, and John determined that $75,000 of his investment was unrecoverable, although he expects a possible partial recovery through litigation. How should John treat the Ponzi scheme loss for federal income tax purposes? 

Answer: John’s loss from the Ponzi scheme is subject to the rules under §165. 

The $75,000 loss qualifies as a theft loss under §165(c)(2) because it was incurred in a transaction entered into for profit. Under Rev. Rul. 2009-9, Ponzi scheme losses are treated as theft losses rather than capital losses. The loss is generally deductible in the year of discovery under §165(e), provided there is no reasonable prospect of recovery. Because John expects potential recovery through litigation, the deductible amount must be reduced by any reasonable expected recovery. 
 
John may alternatively elect the safe harbor under Rev. Proc. 2009-20, which provides a simplified method to calculate the deductible loss and removes the burden of proving the exact amount of theft. The theft loss is reported as an itemized deduction on Schedule A and is not subject to the $100-per-event or 10% of AGI limitations.