Investors in Ponzi Schemes that profit from those schemes are often called upon to return those profits after the Ponzi Scheme has collapsed, leaving certain investors who (1) have profited from the Ponzi Scheme;  and (2) those who have lost money in the Ponzi Scheme.  

A trustee in bankruptcy is typically appointed, and the trustee can force the return of profits made by investors from the Ponzi Scheme.  These are “known as a Clawback”.  Profitable investors may also be called upon to return both their “profits and or their principal investments” that were returned to them.       

There is a unique section of the Internal Revenue Code that permits investors who are forced to make a pay back of profits, to be able to go back in time (even after the Statute of Limitations has run) and obtain refunds from closed years that may be much more valuable than a simple theft loss deduction.  Often refunds from the past are more than likely to have been taxed in much higher tax brackets.  These refunds of past profits often provide much higher returns than a simple current deduction.

Learning Objectives
  • Explore the tax code section that allows taxpayers to recover tax refunds from taxable years that are normally not available under typical circumstances.
  • Identify the requirements of taking advantage of a little known tax code section.
  • Discover the procedures that investors who made money in fraudulent investment schemes must face years after the investment has crashed.
  • Recognize that there are alternative methods of recovery of taxes paid from a Clawback.
Last updated/reviewed: August 14, 2023
2 Reviews (19 ratings)


Member's Profile
An interesting and informative look at how tax recovery is impacted for theft loss, clawback of earnings, clawback of principal. This really increased my understanding of the mitigation rules and how Trump's new bill impacts the treatment of these funds. Thank you!

Anonymous Author
Interesting topic and glad to learn about something that I would not have otherwise known.

Course Complexity: Intermediate

No advanced preparation or prerequisites are required for this course.

Education Provider Information
Company: Illumeo, Inc., 75 East Santa Clara St., Suite 1215, San Jose, CA 95113
Contact: For more information regarding this course, including complaint and cancellation policies, please contact our offices at (408) 400- 3993 or send an e-mail to .
Instructor for this course
Course Syllabus
  Introduction to Ponzi Scheme Theft Losses and The Repayment of Profits by Those Who Prospered (THE “CLAWBACK”)9:58
  Mitigation Section7:34
  Mitigation Section Continued6:52
  The Claim of Wrong Exception to the Claim of Right Principal2:47
  Entitlement to Deduction in Year of Payment8:15
  Summary: The Clawback of Profits8:56
  Ponzi Scheme Theft Losses and The Repayment of Profits by Those Who Prospered (THE “CLAWBACK”)49:45
  Slides: Ponzi Scheme Theft Losses and The Repayment of Profits by Those Who Prospered (THE “CLAWBACK”) PDF
  Ponzi Scheme Theft Losses and The Repayment of Profits by Those Who Prospered (THE “CLAWBACK”) Glossary/IndexPDF
  Supporting DocumentPDF
  Review Quizquiz
 Final Examexam