New York, NY · Member since 2008 · 89 posts · 9 votes
Folks
Are there any DJE North investors here. Are you applying any Ponzi scheme policies to take losses for your entire principal amount? The rules are quite confusing and so far my CPA just sent the below to me. In addition, I have a gain of a few thousands of Section 1231 gain too that I have to pay long term capital gains on
There is NO capital gain or loss in this partnership because even though you invested $50,000 into the partnership and didn’t receive any money back, the partnership incurred liabilities that you were liable for. Had you still been liable there would be a loss but since you were relived of the liabilities it was a wash.
Accountant · San Francisco, CA · Member since 2026 · 88 posts · 46 votes
10h
Hi Sam, sorry you got pulled into this one. Brutal.
Two things I'd raise with your CPA before you file, because the answer you got sounds like only half the picture.
The Ponzi angle you're asking about is real. A loss from a fraudulent investment scheme is generally a theft loss under section 165, not a capital loss, which means it's ordinary and not stuck behind the $3k cap. There's even an IRS safe harbor (Rev. Proc. 2009-20) that lets qualifying investors deduct 95% of what they put in, taken in the year the fraud is discovered, and a guilty plea counts as discovery. One catch though. That safe harbor was written for investors with a fairly direct line to the fraud. If you were in through a fund or a partnership instead of direct, whether you qualify gets murkier, so that's the first thing to pin down.
On the "relieved of the liabilities so it's a wash" answer: that's a partnership basis argument, and it only holds if your K-1s actually allocated you partnership debt that later got wiped. I'd ask them to walk you through the math. Did your K-1 put liabilities on you, were they recourse or nonrecourse, and were you really on the hook for them. If you never truly carried that debt, the wash starts to wobble.
And I'd poke at that few thousand of 1231 gain while you're at it. If it's phantom gain reported on a K-1 from the same outfit that defrauded you, I wouldn't just pay tax on it without a hard look.
None of this is advice on your specific facts, just the questions I'd want answered in your shoes. Theft loss versus capital wash is a big swing. Worth a second set of eyes.