Step 3: Determine the amount of the theft loss from the investment scheme.
The amount of the loss is the lesser of 1) the fair market value or 2) the adjusted tax basis of the property invested in the scheme. Treas. Regs. §1.165-8(b) provides that the amount deductible under this section in respect of a theft loss shall be determined consistently with the manner prescribed in §1.165-7(b) for determining the amount of casualty loss allowable as a deduction under section 165(a). Treas. Regs. §1.165-7(b)(1) states:
In the case of any casualty loss whether or not incurred in a trade or business or in any transaction entered into for profit, the amount of loss to be taken into account for purposes of section 165(a) shall be the lesser of either
(i) the amount which is equal to the fair market value of the property immediately before the casualty reduced by the fair market value of the property immediately after the casualty; or
(ii) the amount of the adjusted basis prescribed in § 1.1011-1 for determining the loss from the sale or other disposition of the property involved.