A specified fraudulent arrangement is the IRS term for a Ponzi-type investment scheme, defined by five features: the operator takes investors' cash or property, purports to earn income for them, reports income that is partly or wholly fictitious, pays some investors out of other investors' deposits, and appropriates investor funds. The term comes from Revenue Procedure 2009-20.
The five features are cumulative, and a crypto scheme is measured against each of them. Taking investors' property covers deposits in any form, so BTC or stablecoins sent to a platform count as much as wired dollars. Purporting to earn income is the yield, trading or mining story the platform told. Reporting fictitious income is the dashboard balance, the monthly statement or the app notification showing returns that were never earned. Paying investors from other investors' money is what kept withdrawals working for as long as they did. Appropriation is the operator taking the funds.
The last feature is the one that separates fraud from failure. A protocol that lost deposits through an exploit or a platform that collapsed through bad lending may have reported balances that turned out to be wrong, but if the operators did not take the money, the arrangement is not a specified fraudulent arrangement, however reckless it was.
A high-yield platform that promised fixed daily returns, showed compounding balances, paid early redemptions from fresh deposits and moved the rest to the founders' wallets meets all five. A trading bot with fabricated performance funded by referral recruitment meets them. A token project whose price fell 95 percent after launch does not, because no purported income was reported and no investor was paid from another's deposit, even where the founders behaved badly; that is analysed as a crypto rug pull.
It is the first of three gates to the Ponzi scheme safe harbor. Revenue Procedure 2009-20 defines the term, and only a loss from an arrangement meeting the definition can be a qualified loss or belong to a qualified investor. The definition is applied on the facts of the scheme as they emerge, usually from the indictment, the receiver's reports or regulatory filings. An investor's own belief that a platform was a Ponzi scheme does not satisfy it.
Meeting the definition does not, by itself, produce a deduction. The other two gates must also be passed, and the qualified loss test in particular requires that the lead figure be charged, or be the subject of a criminal complaint with an admission, a receiver or an asset freeze. Many crypto schemes satisfy the five features on their facts and still fail the safe harbor because no charge was ever filed.
Outside the safe harbor, the same five features remain useful. They describe a theft by false pretences, which supports a Ponzi scheme loss claimed under the general theft loss rules in IRC Section 165 and Treasury Regulations section 1.165-8, with the discovery year and the reasonable prospect of recovery analysed on the facts. The definition says what has to be proved about the scheme; it does not say which route to use.
The fictitious income feature creates a reporting problem in both directions. If the platform's reported returns were included in income on earlier returns, they become part of the loss and need to be documented from those returns and the platform statements. If they were never reported, they cannot be added to the loss, and a loss schedule that uses the dashboard balance rather than the cash and basis actually put in overstates the deduction by the entire fictitious gain.
Read our 2026 Guide to Claiming Crypto Losses from Fraud, Scams, Theft
CountDeFi specializes in fraud, hack and theft loss accounting, including scheme fact analysis, platform statement reconciliation and qualified investment computations. See pricing.
