Dear Tax Man: My mom spent $90,000 on bitcoin, gifts, and computers because of an online romance scam. Will the tax law provide any damage control?

By Andrew Cashner

“Does this somehow fall under the Gift Tax Act?”

Dear Taxman,

My mom went into debt to buy bitcoin for a scammer because she thought she was in a romantic relationship with him. She also ran up credit card debt to send computers and gift cards to the scammer.

She is now over $90,000 in debt due to this fraud, with no relief. She was too embarrassed to admit she was being taken advantage of at the time, and she didn’t ask for help.

How does she answer 2022 tax questions about buying bitcoin she doesn’t even own, or the personal losses she’s suffered? Does this somehow fall under the Gift Tax Act?

PS She apparently deposited money into the scammer’s account through a bitcoin machine. This happened several times in February 2022. The fraudster or fraudsters have not been caught.

Sad daughter

Dear sad daughter,

It’s the cold-hearted scammers who should be embarrassed and ashamed of preying on your mother, not her.

Unfortunately, your mother is not alone. People filed nearly 53,000 romance-related fraud complaints with the Federal Trade Commission through the third quarter. Characteristics of the con include requests to transfer money, send gift cards or transfer cryptocurrency, the regulator noted.

People last year reported a record loss of $547 million due to these particularly sinister scams, the FTC said.

After all the financial wreckage, you wonder if the tax code offers damage control. This is where I have a heavy heart. From what I’ve learned, it’s hard to believe that tax rules from the Internal Revenue Service can or will provide relief.

The tax rules related to cryptocurrency may not help, and gift tax rules don’t exactly apply. There is a deduction for theft losses, but the facts may not be correct. Also, a theft loss claim without backup documentation can trigger an audit risk.

“There’s no good answer, unfortunately,” said Matt Metras of MDM Financial Services, which specializes in cryptocurrency and taxes.

Start with 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, she might be able to take a capital loss to reduce her taxable income. But it sounds like she immediately sent the money to the scammer.

In recent years, the IRS has asked a “yes” or “no” question about a taxpayer’s cryptocurrency holdings. The wording has changed, but saying “yes” does not necessarily mean that a person will pay tax on the digital asset. (Along these lines, there is no “realized” capital gain or capital loss if a person merely acquires and holds the crypto.)

“I would advise her to check ‘yes’ because she got involved in cryptocurrency in some way. That covers her bases,” Metras said. “I would also say ‘yes,'” Ed Zollars, an accountant at Thomas, Zollars & Lynch and also an instructor for continuing education for accountants.

Metras and Zollars did not see a gift tax issue at play. It is also a practical matter, noted Metras. In the tax return for gifts for amounts or gifts above the annual exclusion amount, the tax authorities ask for the recipient’s name, address and relationship to the gift giver. In theory, your mother could file a tax return, Zollars said. But she could skip it and “probably the world won’t end either.”

Theft loss deduction

Because of the Tax Cuts and Jobs Act of 2017, theft and personal casualty losses are “deductible only to the extent the losses are attributable to a federally declared disaster,” the IRS says. This rule applies from tax year 2018 to tax year 2025

For example, misplaced and/or lost money or property is not deductible, the IRS said in instructions for the 2021 tax year. The same goes for broken “china, glass, furniture and similar items under normal conditions.”

So there is wiggle room for people recovering from natural disasters. But there is still room for maneuver for a certain part of aggrieved investors, explained Zollars.

On the one hand, the IRS says that a stock’s loss in market value due to “disclosure of financial statements or other illegal misconduct by officers or directors of the company issuing the stock” is not deductible under the theft and damage deduction rules (although it can be sold for a capital loss).

However, “victims of fraudulent investment schemes may claim theft loss deductions if certain conditions apply,” the IRS notes, pointing to rules for victims of “Ponzi-type” investments.

It’s a mixture of criteria, but let’s cut to the chase. For your fooled mother’s purposes, the potentially deductible losses occurred after the investor entered into a transaction with an eye toward profit, Zollars notes.

He points to wording in the tax code about “losses incurred in any transaction entered into for profit but not connected with a trade or business.”

“It doesn’t sound like your mother had a lot on her mind,” Zollars noted. “The odds are we’re going to have problems with this, but it’s worth looking at,” he said.

Receipts and documentation can paint that picture – that is, if they exist.

In his experience, Zollars said, taxpayers trying to pick up the pieces after a fraud “are going to get embarrassed and start destroying evidence before they even admit to anybody, before they even admit to themselves that they are stolen from, they start covering up the evidence and destroying 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 raise the curiosity of the IRS, Zollars said.

“We all have vulnerabilities. It’s these unscrupulous people who take advantage of our own human vulnerabilities,” said Eva Velasquez, president and CEO of the Identity Theft Resource Center, a nonprofit that helps identity fraud and fraud victims.

Although Velasquez emphasized that she was not providing legal advice, “I would seek a bankruptcy attorney and ask what the options are.”

Anyway, here’s her message to your mom: “You were lied to, plain and simple. You were lied to and it’s not your fault.”

Tax fraud

While we’re on the subject of fraud and the IRS, here’s a reminder as tax season approaches. Be aware of government scams — The FTC has received nearly 150,000 complaints of this type of scam so far this year.

The IRS repeatedly notes that it contacts a taxpayer by letter. Any calls, texts, emails or social media messages claiming to be from the IRS and asking for payments or sensitive financial information are false and malicious

Add on. Delete. Overlook.

Do you have a tax question? Write me at: [email protected]

Thank you for reading. I will help you think more broadly about the issues affecting your taxes. I’m not offering tax advice, just an attempt to look at what the whirlwind of tax rules and financial conditions could mean for your wallet.

I am here for the reader who meets his treasures with a sense of resignation. You’re just not that into taxes, I get it. I was once that guy. Beneath the jargon, think of your treasure as a maze — with money at the end. Or a trap you must avoid.

-Andrew Cashner

(END) Dow Jones Newswires

12-15-22 1504ET

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