This was my email to my accountant friend:

Subject: Madoff

Missed you. Etc. Have a very important "yes" or "no" question.

Can the Madoff victims write off the loss of principle, the money which was stolen?

Thanking you in advance for your careful consideration of this weighty matter. There will be a test, you will be held accountable.

Love,

Bowser

Answer:

Subject: RE: Madoff

Yes, to the extent they have cost basis, i.e. the amount of money they
invested with him. The next question would be: Do they claim a capital
loss, i.e. stock loss. Or do they claim a casualty loss, i.e. theft loss.
That would lie in the details.