Dear Tax Guy,
My mom went into debt to buy bitcoin for a scammer because she thought she was in a romantic relationship with him. She also racked up credit-card debt to mail computers and gift cards to the scammer.
She’s in debt now for over $ 90,000 due to this scam, with no relief. She was too embarrassed to admit that she was being taken advantage of at the time, and she didn’t ask for help.
How does she answer tax questions for 2022 about buying bitcoin that she doesn’t even own, or the personal losses that she has endured? Does this somehow fall under gift-tax laws?
P.S. She apparently put cash into the scammers account through a bitcoin machine. This happened multiple times in February 2022. The scammer or scammers have not been caught.
Sad daughter
Dear Sad Daughter,
It’s the cold-hearted con artists who ought to be embarrassed and ashamed of preying on your mother, not her.
Regrettably, your mom isn’t alone. People have submitted nearly 53,000 romance-related scam complaints to the Federal Trade Commission through the third quarter. Hallmarks of the con include requests to wire money, send gift cards or transfer cryptocurrency, the regulator noted.
People last year reported a record $ 547 million in losses due to these particularly scuzzy scams, the FTC said.
After all the financial wreckage, you’re left wondering if the tax code offers damage control. Here’s where I have the heavy heart. From what I have learned, it’s a stretch to believe that Internal Revenue Service tax rules can or will offer relief.
The tax rules connected to cryptocurrency may not help, and gift tax rules don’t exactly apply. There is a theft-loss deduction, but the facts might not fit. Besides, a theft-loss claim without backup documentation could spark an audit risk.
“There’s no good answer, unfortunately,” said Matt Metras of MDM Financial Services, who specializes in cryptocurrency and taxes.
Start with the crypto. Just buying it doesn’t result in a taxable event, Metras said. If she bought, held and sold during the digital asset’s rough 2022, maybe she could take a capital loss to reduce her taxable income. But it sounds like she instantly beamed the money to the scammer.
In recent years, the IRS has been prominently asking a ‘yes’ or ‘no’ question about a taxpayer’s cryptocurrency holdings. The wording has been changing, but saying ‘yes’ doesn’t necessarily mean a person is going to face taxes on the digital asset. (Along those lines, there’s no “realized” capital gain or capital loss if a person simply acquires and holds onto the crypto.)
“I would advise her to check ‘yes’ because she engaged in cryptocurrency in some way. It covers her bases,” Metras said. “I would say ‘yes’ too,” Ed Zollars, an accountant at Thomas, Zollars & Lynch and also an instructor for accountants’ continuing education.
Metras and Zollars didn’t see a gift tax issue at play. There’s also a practical matter, Metras noted. In the gift tax return for amounts or gifts over the annual exclusion amount, the IRS is asking for the recipient’s name, address and relationship to the gift giver. In theory, your mom could file a gift tax return, Zollars said. But she could skip it and “probably the world will not end either.”
Theft loss deduction
Because of the 2017 Tax Cuts and Jobs Act, theft losses and personal casualty losses “are deductible only to the extent that the losses are attributable to a federally declared disaster,” the IRS says. This rule runs from tax year 2018 to tax year 2025.
For example, misplaced and/or lost money or property isn’t deductible, the IRS said in tax year 2021 instructions. Same goes for broken “china, glassware, furniture, and similar items under normal conditions.”
So there’s wiggle room for people recovering from natural disasters. But there’s still also wiggle room for a particular slice of wronged investors, Zollars explained.
One the one hand, the IRS says a stock’s loss in market value due to “disclosure of accounting or other illegal misconduct by the officers or directors of the corporation that issues the stock” is not deductible under the theft and casualties deduction rules (though it could be sold for a capital loss).
However, “victims of fraudulent investment schemes can claim a theft loss deduction if certain conditions apply,” the IRS notes, pointing at rules for victims of “Ponzi-type” investments.
There’s a mix of criteria, but let’s cut to the chase. For your scammed mother’s purposes, the potentially deductible losses happened after the investor entered a transaction eyeing profits, Zollars notes.
He points at tax-code verbiage about “losses incurred in any transaction entered into for profit, though not connected with a trade or business.”
It doesn’t sound like your mother had profits on her mind, Zollars noted. “The odds are we are going to have trouble with this, but it’s worth looking at,” he said.
Receipts and documentation might paint that picture — that is, if they exist.
In his experience, Zollars said taxpayers trying to pick up the pieces after a scam “are going to be embarrassed and start destroying evidence before they even admit to anybody, before they even admit to themselves they are being stolen from, they begin to cover up the evidence and destroy it. That would be my biggest concern with her getting the deduction.”
It’s all about documentation and proof because any attempt to claim the deduction could pique IRS curiosity, Zollars said.
“We all have vulnerabilities. It’s these unscrupulous people exploiting our own human vulnerabilities,” said Eva Velasquez, president and CEO of the Identity Theft Resource Center, a non-profit organization that helps identity fraud and scam victims.
Though Velasquez emphasized she wasn’t giving legal advice, “I would seek a bankruptcy attorney and ask what the options are.”
Either way, here’s her message to your mom: “You were lied to, plain and simple. You were lied to and that is not your fault.”
Tax scams
While we’re talking about scams and the IRS, here’s a reminder as tax season approaches. Be aware of government imposters scams — the FTC has received nearly 150,000 complaints about this brand of scams so far this year.
The IRS repeatedly notes it initiates contact with a taxpayer through letters. Any call, text, email or message via social media that claims to be from the tax agency and asking for payments or sensitive financial information is bogus and bad intentioned.
Hang up. Delete. Ignore.
Got a tax question? Write me at: akeshner@marketwatch.com
Thanks for reading. I want to help you think more broadly about the issues that affect your taxes. I’m not offering tax advice, just an attempt to look at what the swirl of tax rules and economic conditions could mean for your wallet.
I’m here for the reader who faces their taxes with an air of resignation. You’re just not that into taxes, I get it. I was once that guy. Underneath the jargon, think of your taxes like a maze — with money at the end. Or a trap that you need to avoid.