Federal Prosecutors Bring Early Christmas for SBF Victims

December 21, 2022

Often, when someone makes headlines for a crime, reporters go sniffing around the miscreant’s neighborhood to see what the people who knew him before he was infamous think. It’s become a cliché to hear them say, “He was such a quiet boy, he would never hurt anyone.” Jeffrey Dahmer was a popular enough kid and even a bit of a class clown until someone looked in his refrigerator.

But sometimes someone commits a crime, and you think, “Oh, yeah, that guy . . . of course.” Ladies and gentlemen, I bring you the headline from a recent article on BusinessInsider.com:

“Sam Bankman-Fried attended a top Silicon Valley prep school where his senior class prank reportedly included making $100 bills with his face on them called ‘Bankmans.’”

Is anyone surprised that a guy who may have committed a little light counterfeiting in high school went on to make up his own currency? Then secretly Venmo it all to his failing “hedge” fund? Then talk about it on a Signal chat called “Wirefraud”? And run the whole thing on QuickBooks? Now, he’s #1 on Santa’s Naughty List, and he won’t be home for Christmas. (He’ll probably spend it in the same jail where Epstein didn’t kill himself.) Meanwhile, his customers and investors will have a Blue Christmas without their money. But there may be a Christmas miracle in the works, thanks to some unusual collusion between prosecutors and the IRS.

Ordinarily, if your assets get caught up in a bankruptcy like what’s happening with SBF, you’re stuck waiting for the legal process to play out. You haven’t actually disposed of anything yet to recognize an immediate loss. And you can’t claim a capital loss for a worthless security for two reasons: 1) you can’t be sure your position will wind up truly worthless, and 2) the SEC hasn’t declared that crypto is a security. (O.J. Simpson is still searching for the “real” killers, too.)

Taxpayers who itemize deductions can deduct theft losses to the extent they exceed 10% of their adjusted gross income. But the Tax Cuts and Jobs Act made that harder by limiting theft losses to those connected to federally-declared disasters. Itemizers can also deduct theft losses from income-producing property as “Other Losses” on Schedule A. However, the TCJA also trimmed the ranks of itemizers to just 10% of taxpayers, further limiting either of those routes.

Here’s where the IRS comes hitching a ride on the back of Santa’s sleigh. In 2009, Bernie Madoff confessed to swindling nearly forty thousand investors. To help speed up their tax savings, the Service issued Revenue Ruling 2009-9, which helps determine how much to deduct for Ponzi scheme losses. And they issued Revenue Procedure 2009-20, which lets victims take those write-offs in “the taxable year of the investor in which the indictment, information, or complaint described in Section 4.02 of this revenue procedure is filed.”

In short, when federal prosecutors filed charges against SBF last week, their prompt action accelerated millions of dollars in tax savings for his victims. (Real dollars, not “Bankmans.”) As for SBF himself, when he saw police outside his door last Monday, he must have seen the first line of his obituary flash before his eyes. It turns out “Take the money and run” is a two-part plan. He nailed the first. Too bad he failed the second.

As for the rest of us, it’s worth remembering that while we may think of the IRS as a bunch of scrooges, sometimes their hearts really can grow three sizes in one day. On that note, we’ll leave you with best wishes for the holidays and beyond!

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