Answer:
The relevant tax issues are as follows:
- Is the loss a theft loss or an investment loss?
- Is the loss subject to either the personal loss limits or the limits on itemized deductions?
- How is the amount of the loss determined?
- In which year can the loss be taken?
- Is there a way to receive a tax benefit for the full amount of income recognized in prior years?
The irrelevant tax issue is:
- Did John have other casualty or theft losses within the last five years?
Explanation:
In this scenario John invested and provided Randy with a power of attorney to use $200,000 to purchase and sell securities on his behalf.
The earnings were to be reinvested, but John realised in 2020 that Randy was running a Ponzi scheme and his account was zero.
As John will most likely not be possible a casualty loss may be allowed.
Since the loss happened in 2017 when he invested the theft loss will be deducted in that year.
He will be able to deduct his losses under 165.
Deductions are allowed for losses in a tax year that is not covered by insurance.
Losses that can be claimed are limited to:
- Losses in business or trade
- Losses in transactions for profit
- Losses as a result of theft, fire, storm, or shipwreck.
