To claim the deduction or the credit, taxpayers must establish that the clawback amount was required to be repaid to the trustee and substantiate that payment was made. The FAQs can be found at www.irs.gov by searching for “clawback repayment,” or by using the link at the beginning of this page.
The IRS issued FAQs regarding the tax treatment of clawback repayments for amounts previously reported as income from a Ponzi scheme. The term clawback describes the power of a trustee to recoup profits earned by an innocent investor in a Ponzi scheme that should have been available as part of a bankruptcy estate. The FAQs indicate that the repayments are not additional theft loss deductions, but are repayments of claim-of-right income that result in either a non-theft investment loss deduction or a credit calculated under IRC Sec. 1341, whichever results in lower tax.