2019 Update
Please read this section first. It supercedes information in other sections below. This is updated now that a presumably final distribution was sent.In January, 2019, a final distribution was sent to creditors (it is possible that other money could be collected and distributed, but considered unlikely). This can be used to determine your exact loss. What happens next depends on a few factors:
- [1] If you already took a deduction as a theft loss, and the loss you claimed was more than your actual loss (e.g. you either claimed the entire amount as a loss, or assumed you would get less money back than you actually did with this distribution), then you would need to claim this as income. See the IRS instructions.
- [2] If you already took a deduction as a theft loss, and the loss you claimed was less than your actual loss (e.g. you assumed you would get 50% back), you can take the rest of the loss as a deduction. See the IRS instructions.
- [3] If you already took a deduction as a capital loss, my guess is that you would need to either amend your previous return (to not take the loss) and take the loss in 2019 instead, or possibly report this distribution as miscellaneous income. Note that I have not been able to confirm this.
- [4] If you have not taken a deduction, the easy option is to take the loss on your 2019 tax return (the year you receive the distribution), as a capital loss. This would be done about the same was that you would with a stock that became nearly worthless (e.g. if you paid $10,000 and got back $250, you would report a loss of $9,750). Note that the theft loss deduction was eliminated for the 2018 and later tax returns, so this could only be treated as a capital loss for 2018 or later tax returns.
- [5] If you have not taken a deduction, it may be possible to amend a previous return to claim this as a theft loss. This gets a bit tricky, for a few reasons (for example, the theft loss is not allowed on 2018 and later returns, so an amended return to get a theft loss might be scrutinized carefully, and there would be the question of whether to enter the exact loss that is now know or whether you would have to enter the estimated loss given what was known in 2017 or earlier).
In 2015, we were told that the assets were worth millions of dollars to the right person. In 2016, we knew about Platform Universe -- the company that was attempting to recoup all losses. Platform Universe started around March, 2017. So before the tax year, the amount of recovery was very uncertain. However, on October 19, 2017, I wrote "it appears that Bullion Universe a/k/a Platform Universe never got anywhere." There was a "litigation trust", into which wholesaler Dillon Gage paid $324,500 in late 2017, but as far as I can tell no information was given about any amounts they were going to attempt to recover from anyone else. So I think it is fairly safe to consider 2017 the year the loss was sustained (Platform Universe ran for 6+ months without any sign of a single sale or even advertisement).
Tax Deduction Summary
Losses incurred by Bullion Direct creditors should definitely be allowed as capital losses (at capital gains rate), and probably could instead be deducted as theft losses (at the ordinary income rate, providing a larger deduction).However, the deductions might not be allowed until all distributions are received. It is likely possible to deduct the majority of the loss in 2015, and later pay tax on any distributions.
If it were me, my first choice would be to ask Bullion Direct for an idea of what percentage of the claims could be considered as having a reasonable expectation of recovery (in other words, the maximum percentage of claims he thinks might be made). I would then deduct the difference between that and what I had paid to determine the expected loss, and report it as a theft loss. Without such information from the Bullion Direct, I would likely wait until a future year to report a loss.
How Creditors Can Deduct Bullion Direct Losses
First, the disclaimer: I am not an accountant (or lawyer, or anything else I do not claim to be). This is just how I would look at the situation if I was preparing my taxes and did not have an attorney, accountant or tax expert to help me. I strongly recommend that you have your own expert(s) look into this, but also understand that many people for various reasons will not.That said, I have done quite a bit of research on the ways of deducting losses. Consider this page a guide helping point you to the right resources, not a definitive source of information.
Options for Deducting
In general, it seems that there are 2 ways you can deduct losses (specifically, if you paid for metal and did not get it, or if you sent metal and did not get paid).
- Capital Loss. This is the 'normal', safe way to deduct the loss. It should be the same as if you sold the metal for a loss (except that you got $0 for it, instead of a larger amount), or it fell off the side of your boat into the water and was unrecoverable. The catch is that you may have to wait to take the deduction.
- Theft Loss. This may or may not be allowed by the IRS in these circumstances, but may allow for a larger deduction. There are a number of potential pitfalls with a theft loss. Note that you must itemize your deductions to use this, and cannot use the standard deduction.
| Capital Loss (§1211) | Theft Loss (§165) | |
|---|---|---|
| Where to Report | Schedule D | Form 4684 Section B (goes to Schedule A Line 28) |
| Effect | Reduces Capital Gains | Reduces Adjusted Gross Income |
| Tax Savings | About 0-20% of loss | About 0-39.6% of loss |
| Audit Potenial | Low | High |
| Allowed? | Almost certainly | Probably |
| Carryover? | Indefinitely | Back 3 years , Forward 20 years |
| Year to Claim | Unclear (but same) | |
Year to Report
Short version: You can deduct much of the loss in 2015, but must factor in the expected reimbusement (which presumably would need to come from Bullion Direct). In later years, your tax return should reflect whether you received less distributions than you expected, or more. If you want more details, read on.The year to take a capital loss is actually covered by §165. §165 has special rules for worthless securities (which does not apply here). §165 does not distinguish between §1211 capital losses and theft losses as far as the year to report is concerned.
Therefore, I believe the year to report the loss should be the same, regardless of whether you report it as a capital loss or theft loss.
The IRS states "Theft losses are generally deductible in the year you discover the property was stolen unless you have a reasonable prospect of recovery through a claim for reimbursement. In that case, no deduction is available until the taxable year in which you can determine with reasonable certainty whether or not you will receive such reimbursement."
They also state "If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. You must reduce your loss even if you do not receive payment until a later tax year." This suggests that you would deduct the loss in the 2015 tax year, subtracting the amount that you expect to receive. If you then receive distributions more or less than you expected, you need to follow the rules the IRS has here.
Further research leads to Treas. Reg. § 1.165-1(d). It essentially says that if there is a claim for reimbusement with a reasonable chance of recovery, you cannot deduct the loss until the year in which there is reasonable certainty whether or not the loss will be received. According to the Journal of Accountancy, "incorrigible optimism" is not required. This would lead me to believe that you could take the deduction in 2015 minus the amount that you can reasonably expect to receive. At the end of 2015, it was known that Bullion Direct's best offer was $200K cash (with creditors getting part of the profits), and known assets of perhaps $800K. That is before expenses. I personally think that deducting 90% of the loss would be easily justifyable -- but I do not have access to Bullion Direct's records.
It seems that taking this information together, if there is a chance of a partial recovery (as is the case here), the expected loss (after accounting for money that would be recovered) would be deductible in the year the theft was discovered. So I believe in this case, you would be entitled to deduct perhaps 90% or so of the loss in 2015 (again, that 90% figure is not a number calculated by an expert).
So while I think that you could report most of the loss in 2015 (whether you decided to report it as a capital loss or theft loss), you would almost certainly have to report either a gain or a loss in a later year.
Options for Deducting
From what I understand, there are two primary options: a standard investment capital loss (§1211), or as a theft loss (§165(c)(2)).
Capital Loss
This is the 'safe' way that most accountants would likely suggest. Just as you can deduct that stock you bought for $10,000 that later became worthless, you can deduct gold that you paid for that never showed up. This is a capital loss, and you can deduct up to your capital gains (if more than your capital gains, $3,000 can be used against income for a number of years). This is a nearly foolproof deduction, but since it is normally applied to capital gains, the deduction ends up being worth less than if it was applied against your income.A couple catches are that [1] you still need to determine your actual loss (based on the expected amount of money you may receive in distributions), and [2] you will likely need to report the loss over several years (unless you get the exact amount in distributions that you used in your loss calculation).
Theft Loss
This may or may not be allowed by the IRS, depending on the circumstances.The good news is that if allowed, it would let you deduct the loss by having it applied against your income, which can generate a much bigger deduction than a capital loss.
There are plenty of drawbacks, however. First, you have to prove that the loss was a theft loss and done with criminal intent. Some accountants are familiar with this type of theft loss deduction. The IRS reportedly frequently audits returns that use this deduction (although if you take the deduction appropriately, you should have nothing to worry about with an audit).
So was this a theft loss? I believe it almost certainly would be considered a theft, as the money was taken for the benefit of Bullion Direct, and it appears to have violated law (e.g. they claimed they had $24M or so of metal, but under $1M was in the vault -- someone stole it). The IRS admits the word "theft" is general and broad, so there is likely not an issue with it being considered a "theft." However, the IRS also requires that the taxpayer prove that it was done with criminal intent (Revenue Ruling 72-112, 1972-1 C.B. 60).
Theft Loss: Intent - a/k/a Criminal Intent
This piece gets a bit dicier. Criminal intent is a legal term, likely with a high bar (to prevent people from going to jail for simple mistakes). You would need a lawyer to determine if there was true criminal intent.However, it turns out that the IRS requires "criminal intent" not because they believe the theft should have been committed with criminal intent, but because the common dictionary definition of "theft" in 1947 included the word "intent." The word "intent" was likely used to show that the common meaning of the word "theft" refered to an act that was not accidental (e.g. if you accidentally take someone else's coat at a coat rack that looks just like yours, the word "theft" would not be appropriate).
Specifically, criminal intent is required per Rev. Rul. 72-112, which points to 436 F.2d 146 (1970), which points to 291 F.2d 908, which points to 232 F.2d 107, which points to 239 S.W.2d 538, 540. The IRS use of the word "intent" originates from the final one (239 S.W.2d 538, 540), which points out that the word "theft" is very broad, and includes the definition of the word "theft" from a standard dictionary (not a legal dictionary), where it is used as the "ordinary meaning" of theft. It is in 291 F.2d 908 where "criminal intent" first appears, stating that "criminal intent" is required, citing 232 F.2d 107. But 232 F.2d107 just uses the layman's definition of 'intent' (and does not specify criminal intent). Again, I do not have a legal background, but it seems clear to me that the reason that the IRS requires criminal intent is primarily to meet the dictionary definition of theft.
My understanding is that if Bullion Direct stated that the title was yours (e.g. "allocated"), and the metal isn't there, it would be a stretch to say it was not taken with criminal intent. Also key here is that a judge just sentenced Hannes Tulving, Jr. to jail for wire fraud, for taking orders that he knew could not be delivered. As far as I know, criminal intent exists even if you hope to later return property that was taken in violation of the law. For example, if I need $1,000 to keep my business running for another month, and I rob a bank to do so (planning to pay them back if things went well), I imagine criminal intent would exist there. Personally, I would have no problem whatsoever treating this as a theft loss. But this is what tax accountants and lawyers get the big bucks to determine.
As a reminder again, I am not a lawyer; these are my own personal interpretations, and not intended as advice.
Theft Loss: Audit?
The IRS has determined that the §165(c)(2) theft loss deduction may be abused, and there is even a government paper "Many Investment Theft Loss Deductions Appear to Be Erroneous." They sampled 140 Year 2008 tax returns that took the deduction, and found that 81 (58%) did not appear to meet the qualifications for the deduction! It also says "As of December 24, 2010, the IRS determined that 96 percent of the 1,761 investment theft loss claims associated with tax returns under examination were erroneous."A company that used to specialize in helping people get these deductions stated estimated that over 80% of their clients' returns were examined (general exam, detailed audit, or full appeal).
If you are overly concerned about an audit (which you should not be if you fill out your returns honestly, even if mistakes are made), you could report this as a capital loss instead of a theft loss.
The Problems
The first problem is that all the facts are not in yet.The second problem is that either the Theft Loss will be allowed or it will not, but there is no way to know for certain. A Private Letter Ruling could be obtained, but that would be expensive (it looks like $2,000 at the minimum), and only directly applies the the individual obtaining it. However, if others were aware of the ruling, it could make their lives much easier. Without a Private Letter Ruling, it is likely that many returns will be examined.
For a theft loss, criminal intent could become an issue. A criminal investigation was started, but almost no details are available about it. And there is little available information from the IRS (or other easy-to-access sources) regarding what constitutes "intent."
It could be argued that Bullion Direct did not intend to take the money or bullion permanently. However, given that the losses go back to about the year 2000, that would be an extremely weak argument. Even if the intellectual property was worth $10M, that wouldn't have covered the loss. Also, if a theft was commited with an intent to return the property, that does not necessarily mean that it was not a theft.
A theft loss (as opposed to capital loss) would result in a high audit potential. In theory, that should not prevent you from taking the deduction, but that would be a deterrent to many.
Warning
As I write about audits, I should point out that there are some people on silver and gold forums who boast how they would never pay capital gains tax if they made a profit on selling precious metals. Usually it is due to reasons that the IRS clearly does not allow ('frivolous tax arguments').My guess is that most Bullion Direct creditors do not feel this way. If you do, however, I would strongly suggest not even thinking about deducting this as a loss in any way. If you feel that capital gains do not apply to precious metals transactions, and try to deduct a loss from a precious metals transaction, in my mind that would be blatantly fraudulent. You really do not want the IRS thinking that you are committing fraud.
IRAs
For IRAs, you should look at 2010-0200.The key here is whether you have basis or not. In other words, if you originally deducted the amount that you put into the IRA, you would not be entitled to deduct this as a loss.
The reason for this is that the deduction this page talks about occurs because you paid income tax on the money you used to buy metal. So if you bought metal (not in an IRA) for $10,000, you originally earned perhaps $12,500, and paid $2,500 in tax on that. Therefore, you can deduct it as a loss and get the $2,500 back that you had paid the government.
But with an IRA, if you put $10,000 into the account and deduct it, then you only had to earn $10,000, and no money went to the government. Therefore, you never paid the government any money that they could give back to you.
FAQ
Do the 10% and/or $100 Limitations Apply to a Theft Loss?
No, according to this web site. It explains in detail why the $100 and 10% limitations do not apply.Specifically, if this qualifies as a theft loss, it would be a 165(c)(2) loss, not 165(c)(3) (as the loss was incurred in a transaction entered into for profit). Section (h), which has the $100 and 10% limitations, should only apply to 165(c)(3) losses. Although that seems pretty clear to me and the author of that webpage, it is apparently misunderstood by many lawyers (in other words, be very careful believing me on this!). However, to me the IRS website makes it clear that the $100/10% only applies to personal use property (as opposed to for-profit transactions).
Further, the IRS makes it very clear that the 10%/$100 rules only apply to "personal use property", and not "income producing property" (which 165(c)(2) refers to as "losses incurred in any transaction entered into for profit").
Finally, Revenue Ruling 2009-9, although aimed towards Ponzi victims, states "In opening an investment account with B, A entered into a transaction for profit. A's theft loss therefore is deductibe under § 165(c)(2) and is not subject to the § 165(h) limitations." I take that to mean that a for-profit transaction is not subject to the 10%/$100 limitations.
Does the Ponzi Safe Harbor Apply Here?
Probably not, from what I can tell.Specifically, in my opinion, this does not meet the normal (or IRS) definition of a Ponzi scheme. A Ponzi scheme involves someone holding money for an investor, with the promise of interest being paid. Although many customers did have BUllion Direct hold their metal and/or money, I think it is safe to say that Bullion Direct never offered or paid any interest. Rev Rul. 2009-14 and Rev Proc. 2011-58 both require an indictment or criminal complaint, neither of which has yet occurred in this case.
The Safe Harbor rules specify among other things that the "lead figure" receives cash or property *and* purports to earn income for the investors *and* reports income that is ficticious *and* pays out some income. It also requires that the lead figure be charged with a crime (as opposed to a standard Theft Loss, which does not require criminal charges). At least as of this writing (March, 2016), there was nothing suggesting that any criminal charges had been filed (just investigations).
What If My Loss Exceeds My Income?
You should be eligible for a "Net Operating Loss", where the deduction carries over to the next year.
Can Bullion Direct be considered a Financial Institution?
There are special rules that apply to deposits at financial institutions. However, from my interpretation of 26 USC 165(l)(3), Bullion Direct would not be considered a qualified financial institution. I believe that only applies to banks, credit unions, and other such organizations that are subject to banking or similar laws.
What Proof is Required for Theft Loss?
According to Revenue Ruling 72-112, to qualify as a theft for 165(c)(3) (and presumably 165(c)(2) as well), a taxpayer needs only to prove that the taking of property is illegal under the law of the state where it occurred, and that it was done with criminal intent.
Can I Choose Not to Take the Loss?
I would certainly not consider doing that. Why? Because if you get distributions, and you had not reported a loss, there is a chance the IRS could require you to pay tax on the distribution (which you should not have to do!).
What State Law was Broken?
I am not allowed to say for certain that any laws were broken.However, [1] those with metal stored likely were led to believe that it was allocated -- owned by the creditor, in which case it would seem obvious to me that it was a theft, and [2] with the Tulving case, we saw that it is a crime to take orders knowing that some of them cannot be delivered.
Is a Criminal Conviction Necessary for Theft Loss?
No.Where Can I Get More Information?
I just discovered an eBook that was released this recently, "The IRS and Defrauded Investors: Theft Tax Loss (2015)" ($7.99). It seems to have a pretty good summary of the theft loss deduction.Is It a Capital Loss If I Never Received the Metal?
I believe so. Even though you never received the metal you paid for, you did receive a bankruptcy claim (which has value, and can be sold). So you paid for something, and got something with value. If you sell it for less than you paid for it, you have a loss.In the case of PFG (which went bankruptcy), at least one company states that those with bankruptcy claims that they sold had a realized capital loss. This could only be the case if the bankruptcy claim (or whatever the investors paid for) was considered a capital asset.
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