Tax consequences for investors in fraudulent enterprises – update

Abstract

Purpose

The purpose of this paper is to update investors who have incurred losses from fraudulent enterprises since the publication of Lorence's “Tax consequences for investors in hedge fund frauds”. The critical development is that taxpayers who filed in reliance on the so‐called “safe harbor” provided by the Internal Revenue Service have denied themselves the full benefits otherwise afforded under the law.

Design/methodology/approach

This technical paper describes developments applicable to claiming tax losses for fraudulent investments and fraud (i.e. conversion) of accounts at broker‐dealers. The paper describes the most tax‐effective method for defrauded investors to recoup a portion of their loss through tax refunds and tax losses.

Findings

Given the continuing incidence of financial frauds, once a fraud has been discovered, the defrauded investor must act promptly to claim the most beneficial tax treatment.

Originality/value

This paper builds on the findings of a prior study of the area to update investors on the latest developments in tax treatment of theft losses.

Citation

Lorence, R.D. (2012), "Tax consequences for investors in fraudulent enterprises – update", Journal of Investment Compliance, Vol. 13 No. 1, pp. 4-9. https://doi.org/10.1108/15285811211216637