Frost Law has worked with dozens of clients to provide tax advice related to the deduction of theft losses resulting from online investment scams. These scams, referred to as “pig-butchering” scams, have resulted in billions of dollars of lost retirement and investment savings.
In our experience, the Federal Bureau of Investigation (“FBI”), Department of Justice (“DOJ”), and other federal law enforcement agencies have typically had difficulty in tracking and recovering funds lost to the scam organizations. This is because many of the perpetrators of these scams are not in the United States and have successfully used the anonymity possible through online communication and cryptocurrency payments to avoid detection. However, two recent notable developments show that there is some, however remote, hope for victims trying to recover lost assets.
On Tuesday, October 14, the DOJ through its Office of Public Affairs announced the indictment of Chen Zhi, the chairman of Prince Holding Group, related to his role in operating so-called “pig butchering” scams. The Department of Justice also filed a forfeiture action to recover approximately $15 billion of Bitcoin that are the proceeds of the various scams perpetrated by Zhi and his network. The funds are currently held by the United States government, and through the forfeiture action the DOJ will effectively take custody of the funds and will then be able to return funds to victims who can be identified through the process.
The DOJ’s press release asks the public to provide any potential information related to Zhi and the Prince Holding Group by sending an email to princegrouptips@fbi.gov. Note that this email address is intended to receive tips about Zhi and Prince Holding Group and is not meant to receive email from victims of these scams. The DOJ recommends that victims report any fraud or cyber-related crime to the FBI at www.ic3.gov.
More recently, on November 14 the DOJ announced that a man in Oklahoma was sentenced to prison and required to pay restitution to victims of his cryptocurrency investment firm called Wolf Capital Crypto Trading LLC. A court found that the owner of the firm was operating a large-scale Ponzi scheme and had no intent to return investment proceeds to his victims.
If you do receive a recovery of funds that you lost in a scam after deducting a portion or all of your loss as a theft loss on your federal income tax return, you may be required to pay tax on any such recovery as the restoration of a previously deducted amount. You should consult the tax advisor who assisted you in claiming the deduction, as well as Frost Law, if you have questions about how to treat any amount that you recover.
If any part of your lost funds came from a qualified account, like a retirement plan or IRA, you may wonder about the impact of recovering those funds. Under the normal application of the rules, recovery would be taxable in the same manner as a distribution from the retirement plan or IRA. Of course, because this potential recovery occurs many months (or years) after the initial distribution, you are generally not able to recontribute those funds to an IRA or retirement plan in a rollover transfer.
However, you may be able to take advantage of the IRS’ authority to waive the requirement that a tax-free rollover to an IRA or retirement plan occur within 60 days of the initial distribution. If the IRS grants that relief, you would be able to recontribute the funds to a retirement plan or IRA in a rollover transaction.
Importantly, this would not completely prevent you from paying tax on the recovered amount; the recovered amount would be taxed as the recovery of a previously deducted amount and would still be taxable income. However, to the extent that the funds are able to be rolled over, the rollover would essentially cause the initial distribution to be non-taxable. So, while you lose the ability to deduct the loss to the extent of the recovery, you would also have a reduction in taxable income for the year of the initial withdrawal. There are two additional potential benefits with this strategy.
If you do receive a recovery of amounts lost to a pig-butchering or other scam, Frost Law can assist you in finding the most tax-efficient way to deal with the recovered funds. Contact our team today at (410) 497-5947 or schedule a confidential consultation.
Frost Law has worked with dozens of clients to provide tax advice related to the deduction of theft losses resulting from online investment scams. These scams, referred to as “pig-butchering” scams, have resulted in billions of dollars of lost retirement and investment savings.
In our experience, the Federal Bureau of Investigation (“FBI”), Department of Justice (“DOJ”), and other federal law enforcement agencies have typically had difficulty in tracking and recovering funds lost to the scam organizations. This is because many of the perpetrators of these scams are not in the United States and have successfully used the anonymity possible through online communication and cryptocurrency payments to avoid detection. However, two recent notable developments show that there is some, however remote, hope for victims trying to recover lost assets.
On Tuesday, October 14, the DOJ through its Office of Public Affairs announced the indictment of Chen Zhi, the chairman of Prince Holding Group, related to his role in operating so-called “pig butchering” scams. The Department of Justice also filed a forfeiture action to recover approximately $15 billion of Bitcoin that are the proceeds of the various scams perpetrated by Zhi and his network. The funds are currently held by the United States government, and through the forfeiture action the DOJ will effectively take custody of the funds and will then be able to return funds to victims who can be identified through the process.
The DOJ’s press release asks the public to provide any potential information related to Zhi and the Prince Holding Group by sending an email to princegrouptips@fbi.gov. Note that this email address is intended to receive tips about Zhi and Prince Holding Group and is not meant to receive email from victims of these scams. The DOJ recommends that victims report any fraud or cyber-related crime to the FBI at www.ic3.gov.
More recently, on November 14 the DOJ announced that a man in Oklahoma was sentenced to prison and required to pay restitution to victims of his cryptocurrency investment firm called Wolf Capital Crypto Trading LLC. A court found that the owner of the firm was operating a large-scale Ponzi scheme and had no intent to return investment proceeds to his victims.
If you do receive a recovery of funds that you lost in a scam after deducting a portion or all of your loss as a theft loss on your federal income tax return, you may be required to pay tax on any such recovery as the restoration of a previously deducted amount. You should consult the tax advisor who assisted you in claiming the deduction, as well as Frost Law, if you have questions about how to treat any amount that you recover.
If any part of your lost funds came from a qualified account, like a retirement plan or IRA, you may wonder about the impact of recovering those funds. Under the normal application of the rules, recovery would be taxable in the same manner as a distribution from the retirement plan or IRA. Of course, because this potential recovery occurs many months (or years) after the initial distribution, you are generally not able to recontribute those funds to an IRA or retirement plan in a rollover transfer.
However, you may be able to take advantage of the IRS’ authority to waive the requirement that a tax-free rollover to an IRA or retirement plan occur within 60 days of the initial distribution. If the IRS grants that relief, you would be able to recontribute the funds to a retirement plan or IRA in a rollover transaction.
Importantly, this would not completely prevent you from paying tax on the recovered amount; the recovered amount would be taxed as the recovery of a previously deducted amount and would still be taxable income. However, to the extent that the funds are able to be rolled over, the rollover would essentially cause the initial distribution to be non-taxable. So, while you lose the ability to deduct the loss to the extent of the recovery, you would also have a reduction in taxable income for the year of the initial withdrawal. There are two additional potential benefits with this strategy.
If you do receive a recovery of amounts lost to a pig-butchering or other scam, Frost Law can assist you in finding the most tax-efficient way to deal with the recovered funds. Contact our team today at (410) 497-5947 or schedule a confidential consultation.
