One of our richest individual clients invested some of his personal savings in an investment fund run by Bernard Madoff's Chicago cousin, Milorad Madoff. Milorad's fund was a Ponzi scheme, similar to Bernie's, and he was not indicted until November of 2016. Our client has over $1 million invested in the fund, plus over $50,000 in accrued earnings. He has no idea of how much, if anything, he will get out of its bankruptcy, which is barely underway.
Our client has substantial income from his business and he had some capital gains in 2016, but the market downturn early in the year caused him to realize some loss, too. If he has to recognize his loss from Milorad's fund as a capital loss in 2016, he will have huge a net capital loss, so he would like to claim an ordinary loss, if possible.
Can he claim any kind of loss in 2016? Will his loss be characterized as capital or ordinary, or as a passive activity loss?
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