Personal Finance (Not Investing) • Considering Filing Theft Losses due to a Ponzi scheme

Fellow Bogleheads, I am seeking feedback on the mechanics and any tidbits to look into with regards to filing Theft Losses due to a Ponzi scheme. I searched the forum and everything I found fell into two categories: (1) that is bankruptcy and bankruptcy losses are handled via X, and (2) that is a romance scam (or some such variation) and there is no tax strategies to help with any recovery. I will say that everything I write here is from my own personal research on the matter, not spouting some YouTube video or Reddit thread. As such, I would appreciate any feedback on anything I missed or disagreements (or even agreements) with anything I'm saying. Of course, You Are Not My Lawyer and I won't treat anything said as such.

Preface:
This actual investment involved cryptocurrencies, but that is immaterial to the questions I am posing. I do not intend on this thread being anything about cryptocurrencies themselves and is only there for context. All the questions I am posing would apply just the same if this was any other holding as the questions aren't around the holding, but the firm used. I will not reply or will snip out from my replies anything about investing in cryptocurrencies, so I'd recommend you not even ask any such questions. I will self-report this thread to the moderators for their review immediately upon posting and ask that if they feel I haven't kept this focused on the tax questions that they keep an open mind in working with me to edit the thread to stay within the forum rules.

With that out of the way, here is my situation.

1. I held cryptocurrencies at Celsius Network that filed for Chapter 11 bankruptcy around July 13, 2022. I held all of what was referred to as "stablecoins", which maintained a 1:1 value to USD, so my "value" is also my cost basis.
2. In October 2022, the bankruptcy firm released the claim holdings of the Celsius customers and I agreed with their listing of my claim assets.
3. In November 2022, the bankruptcy firm released their calculations for the USD Value of the claim assets and I agree with their valuation.
4. Former CEO of Celsius indicted for Fraud. Indictment unsealed on July 13, 2023.
5. In late 2023, the bankruptcy exit plan was approved.
6. In February 2024, I received my distribution from the bankruptcy recovery and it matches the figures as outlined in the January 2024 filing (my claim was paid in cryptocurrency). This amounts to approximately 57% of #3 above.
7. In February 2024, I liquidated my cryptocurrency back to USD
8. I have filed an extension for my 2023 taxes to give me time to consider invoking the safe harbor provisions for the Theft Loss due to a Ponzi scheme

On #4, I won't go into to much detail as the link to the DOJ press release is a worthwhile read, but I will include these two snippets:

FBI Acting Assistant Director in Charge Christie M. Curtis said: “As alleged in the indictment, Mashinsky and Cohen-Pavon knowingly engaged in complex financial schemes – deliberately misrepresenting the company’s business model and criminally manipulating the value of Celsius’s proprietary crypto token CEL – while serving in leadership roles at Celsius. The FBI will continue to ensure that anyone committing fraud and deceiving the public through the misrepresentations of a business’s financial standing or practice is held accountable.
...
At various times during MASHINSKY’s tenure, MASHINSKY, COHEN-PAVON, and their co-conspirators also caused Celsius to use its own customer deposits to fund these market purchases of CEL in order to prop up CEL’s price, without disclosing this fact to Celsius’s customers

Having read IRS Revenue Procedure 2009-20, I feel that the scenario for Celsius meets Section 4 definition .01 "Specified fraudulent arrangement" as outlined in the DOJ release about the indictment, and the indictment itself meets Section 4 definition .02 "Qualified loss" and that as of today, the indictment hasn't been withdrawn or dismissed. Section 4 definition .04 "Discovery Year" would align with the indictment being in 2023.

Meanwhile, Section 4 definition .09 would seem to point towards the bankruptcy plan payout as the "Potential Direct Recovery". One provision of the bankruptcy plan approval was declaring if you opt out of the plan and intend to pursue a recovery yourself. I did NOT elect this option and do NOT intend on pursuing recovery myself. This would seem to be what Section 4 definition .10 points towards as "Potential Third-Party Recovery".

If my understanding of 4.09 and 4.10 are correct, it would seem I should take the value from #3 up top, multiple by 95% (no 3rd-party recovery safe harbor), reduced by the #6 value, and claim that amount as a capital loss for 2023. Does this follow for everyone else? Am I missing something obvious? Am I making my life difficult (even though I have the paper trail to provide the IRS should they audit my filing) and should claim years of capital loss carryovers instead?

Regardless of the outcome for me, hopefully this provides some good information for others, regardless of whether it is about Celsius or any other company (regardless of if it involved cryptocurrency).

Statistics: Posted by BrandonBogle — Tue Feb 13, 2024 9:44 pm — Replies 4 — Views 757

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