Crypto Investment Theft

[Boma Osime]

I have a client that was swindled by a company that was purporting to invest crypto currency on his behalf and when it was time to get the money out they became incommunicable. He could not get his investment out either. He had a start -up company that borrowed this money to use for their operations but he withdrew the money from the company for the crypto currency investment that he was swindled of. How do I report this transaction to the IRS. Will this be under the start up company that borrowed the funds or will it be the owner's personal loss. He made reports to both the FBI and AG of the state. Under section 165 can this be deducted as an investment loss without the business making any income yet? The loss from the transfers he made is about $300k.

[Rapid Robert]

"He had a start -up company that borrowed this money to use for their operations but he withdrew the money from the company for the crypto currency investment that he was swindled of.[...] . Will this be under the start up company that borrowed the funds or will it be the owner's personal loss."

If he "withdrew the money from the company", then it will be the owner's personal loss. Also seems like whoever lent money to the company could sue him for fraud, since he did not use the money for the stated purpose of the loan. Will this end up being canceled debt? Since a key purpose of cryptocurrency is to be anonymous, how do you meet the following requirements for a theft loss for tax purposes?

"For a theft loss, you should
be able to show all of the following.
• That you were the owner of the property.
• That your property was stolen.
• When you discovered your property was
missing.
• Whether a claim for reimbursement exists
for which there is a reasonable expectation
of recovery."

I would immediately dis-engage with this client.

[Boma Osime]

Thank you Robert, the client borrowed the company the money that he withdrew from his IRA. I established that the above criteria for a theft loss was met. Please what do you mean by a key purpose of cryptocurrency is to be anonymous? Because one thing I noticed on the crypto receipts is that the company name was not on it and he said he was investing on the company's behalf. I mean the receipts for the money transfer into crypto. Could you please explain?

[ATSMAN]

Others may disagree I say it is personal loss. If I understand the post correctly, the original funds came from the Owner's IRA to fund a start up BUT instead was used to fund the purchase of Crypto. At that point it became a personal investment and it is theft and not even investment loss. What does the receipt even show, if the name is not even there?

Can't deduct any personal theft losses unfortunately!

[Boma Osime]

Thank you Atsman, the IRA funds were transferred to the Company account before it was withdrawn for the crypto Investment. The receipts do not show any name. It just shows the amount sent, the bitcon rate, date and time. The transfers were made at a bitcoin kiosk.

[Rapid Robert]

"what do you mean by a key purpose of cryptocurrency is to be anonymous?"

I mean the following quote from https://www.sofi.com/learn/content/benefits-of-crypto/

More Private Transactions

Privacy can be one of the benefits of cryptocurrency [...]. Blockchains create a public ledger that records all transactions forever. While this ledger only shows wallet addresses, if an observer can connect a user’s identity to a specific wallet, then tracking transactions becomes possible."

Which begs the question. why can't your client find the wallet address of the alleged thief? Or if he can, is there any enforcement agency he can turn to in order to file a claim for restitution? (note that determining the ability to file a claim is one of the requirements to claim a tax loss).