Can You Claim Losses on Deposits Held in Insolvent Financial Institutions And Ponzi-Type Investments?

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Written by Milton Boothe | Posted in Tax Deductions

If you suffered a loss on deposits you had with an insolvent financial institution, or in a ponzi-type investment scheme, all may not be totally lost.

You may be able to claim a deduction for losses on deposits in insolvent financial institutions, and the IRS affords you a number of choices of how to deduct these losses:

• You can treat the loss as a non-business bad debt, and deduct it as a short-term capital loss on Schedule D.
• You can deduct the loss as a casualty loss on Schedule A.
• You can deduct the loss as an ordinary loss under the “miscellaneous deductions subject to a 2% limit” section of Schedule A.

Note that you cannot take a loss deduction for any part of the loss that is federally insured. If any loss deducted in a previous year is subsequently recovered, you must include the recovered amount in your current year income.

If you suffered losses from a Ponzi-type investment scheme, you may also claim a deduction for these losses. These losses can be deducted as theft losses of income-producing properties in the year the loss is discovered. The loss is figured in Section B of Form 4684.

The primary objective of this article is to empower taxpayers to learn to do their own taxes. So for more information on this tax deduction, grab yourself a copy of “Doing Your Own Taxes is as Easy as 1, 2, 3” ($6.98) on TaxConnections.com.

Milton Boothe

Milton G Boothe is an IRS Enrolled Agent with over twenty years of tax and financial accounting experience, including several years at PricewaterhouseCoopers. He is also a British certified Chartered Accountant. He is currently employed in private tax practices where he helps people resolve their tax problems, minimize their taxes, and routinely represents the interests of taxpayers before the Internal Revenue Service. As an Enrolled Agent (EA) Boothe is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals.
Milton G Boothe is also the author of several tax publications, wherein he encourages people to empower themselves by learning to do their own taxes.