If there’s a silver lining to the alleged Madoff Ponzi scheme, it may be the ability of defrauded investors to take “theft loss” deductions for their losses. Generally, a theft loss deduction is limited to the tax basis of the investment minus previous deductions, depreciation or amortization, plus any commissions or transaction costs. In other words, as a general matter, the IRS will not permit theft loss deductions with respect to purported “gains” or “income” from a Ponzi scheme or other investment fraud – amounts referred to, in this context, as “phantom income.” We explain the mechanics of the relevant Internal Revenue Code Provisions and Treasury Regulations, detail relevant precedent and offer a “to do” list for Madoff investors considering claiming a tax loss deduction with respect to their Madoff-related losses.