Ponzi Scheme Loss and Foreign Gift

Technical topics regarding tax preparation.
#1
NYCCPA  
Posts:
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Joined:
23-Apr-2021 5:11pm
Location:
NY
Taxpayer is a US resident.

He invested $1mm into what turned out to be a Crypto scheme. Authorities are investigating, he may get some money back some day, but nothing anytime soon. He was promised a rate of return, in ETH, based on his investment amount. He saw a "return on investment" via ETH transferred into a Coinbase account. But, within two months or so, the account was cleared out.

1) He can take the theft loss as the transaction was entered into for profit, correct?

In addition to his own $500k, he received funds from his parents who are have no U.S. filing requirements as they are not US citizens nor do they have any US source income. I think I have two options here:

1) Report the $500k as a gift from his parents, requiring the filing of a 3520 to report said gift. No tax implications to him or the parents, correct? This would allow him to deduct the $500k he invested along with the $500k the parents invested.

2) The $500k was a loan from the parents, in which he claims no loss. They won't be able to deduct the loss. No 3520 required to be filed.

Correct, or option 3?

TYIA!
 

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