Under the 2017 Tax Act Theft losses are no longer deductible. In Adkins v. United States the Court implicitly agreed that a loss from a pump and dump scheme was a theft loss. This means that as a Taxpayer you are stuck with a capital loss either short or long term if you are the victim of stock manipulation.

Lately, there has been some game playing (interestingly with GameStop). The Company appeared to be on the ropes due to COVID and having stores in brick and mortar malls. Some investors sold the stock short. There is a little known fact on Wall Street, stocks go down faster than they go up most of the time. So, you can make a lot of money if you bet correctly. Gamers and others decided it would be fun to play a trick on short sellers in GameStop. So, they started buying either the stock or call options on the stock. This had the effect of making the demand higher and the stock started going up. People who sold short (meaning they borrowed the shares), had to buy the stock to stop the bloodbath. People who wrote naked call options (meaning the wrote options thinking the stock would go down) had to buy options themselves to cover or buy the stock. This cause the stock to go up further.

A few handy lessons in this. (1) If you are going to sell short, protect yourself at the beginning by purchasing a call option. A call option gives you the right to buy the stock a specified price. That way, if the stock goes up, you have upper level protection against the loss. (2). Stock manipulation occurs all the time. We don’t see it as clearly as in this case. Sometimes its for fun or an academic exercise where people don’t actually buy the stock, just take some actions which have the effect of propping it up, or knocking it down. For example, remember the urine in the beer hoax about Corona Beer, that caused a market shift downward temporarily. Another example a college class had 10 people call five different brokers to ask what’s going on with a certain penny stock (but not to buy). Brokers being salesmen figured the calls were a flurry of interest. And started touting the stock to their customers. And the stock went up slightly. (3) Beware of high pressure salesmen who attempt to get you to buy a stock. Its possible that they or their bosses own a chunk of that stock and once it goes up, they will dump it (pump and dump) leaving you to hold the bag.

So, while stocks are a great investment tool, there is some fraud out there. So, be wise in your investment strategy and use reputable brokers that you know personally.