[cma]

They paid taxes on the ill-gotten gains, so when the gains are taken away in a judgement, there is no need to pay whatever weird quasi-reverse taxes you are thinking of. If the judgment isn't enough after a tax deduction, then just up the judgement.

Don't complicate the tax code even further making it start taxing losses.

(One fair point might be if they paid capital-gains rates or foreign taxes in Ireland or something on the gains from shorting Madoff and yet could deduct the judgment from full US taxes. I don't think that was the case.)