Tax Implications of a Ponzi Scheme

Say you invested with Madoff. You would presumably have received returns from the investment for some years, and paid taxes on them. Then you learned that his investment scheme had been fraudulent, and you found that the market value of your investment had dropped; selling it, you would claim a capital loss on your taxes.

Or would you?

The money that came back labeled as returns of your investment could be regarded as a return of your own money. The money you invested and could not recover was simply stolen from you. So perhaps you should refile your taxes from previous years and not classify the money you received as return of principle, and classify the total losses as theft losses.

On the other hand, what about the interest you would have earned had you put the money in the bank?

Seems like there are going to be some tax lawyers making a lot of money on this one.