Syndicate ponzi scheme taxes
3 Replies
- Accountant · San Francisco, CA · Member since 2026 · 97 posts · 51 votes1w
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.
- 5dAshish AcharyaBusiness MemberCPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes
Sam, Kasing covered the theft loss side well. A few things I'd add, because they change what goes on which return.
Timing first. Under Rev. Proc. 2009-20, the loss year is generally the year the lead figure is charged, not the year of the plea. Elder was charged in January 2026, so the theft loss likely belongs on your 2026 return. If you're finishing 2025 right now, that return may show the 1231 gain with no loss yet. That can be correct, but it should be planned, not accidental.
On the wash, the question I'd ask your CPA is how much depreciation came through your K-1s over the years. In a syndication, that's often what quietly used up part of your $50K, and a 1231 gain on a sale or foreclosure is frequently the IRS taking some of it back. If those losses were suspended under the passive rules, they generally free up once you're fully out of the deal. That could end up being the bigger deduction.
Last thing on the safe harbor: it's 95% only if you're seeking recovery just from Elder and those involved in the scheme. It drops to 75% if you also go after third parties like a bank or advisor. With $66M in restitution agreed in the plea, the recovery side is worth mapping out before you settle on a number.
Feel free to DM me, I’d be happy to connect and share a few resources that may be useful.
INVESTOR FRIENDLY CPA®5241 Reviews - 5dJason MalabuteBusiness MemberAccountant · Los Angeles, CA · Member since 2016 · 2k+ posts · 905 votes
Sam, I'd push back a little on the answer you got before you file. If your loss came from a fraud scheme, it's generally treated as a theft loss rather than a regular capital loss, which means it isn't stuck behind the $3,000 yearly cap, and the IRS has a safe harbor (Rev. Proc. 2009-20) that can let qualifying investors deduct 95% of what they put in for the year the fraud is discovered, with a guilty plea counting as discovery. The catch is that the safe harbor was built for people who invested more directly, so being in through a partnership makes it murkier and that's the first thing to pin down. The "you were relieved of the liabilities so it's a wash" explanation only holds if your K-1 really allocated partnership debt to you that later disappeared, so ask your CPA to walk you through what liabilities were allocated, whether they were recourse or nonrecourse, and whether you were truly on the hook. I'd also take a hard look at that Section 1231 gain before paying tax on it if it came from the same K-1. Did your K-1s actually show any partnership liabilities allocated to you? The right answer depends on your exact facts, so please work through it with your own CPA or tax advisor.
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