Revenue is not income. $1.7 bn is a non-trivial amount even for them. Add to that the $13 bn they had to pay on fraudulent mortgage-bonds some weeks ago and things are starting to sum up.
This is the problem. "They" made billions of dollars illegally. Now, "they" are paying back 1.7 billion dollars. The question is- is it still the same "humans" behind the pronoun?
Certainly Madoff is not paying the lifetime of fuck-you money he has blown. At least now he is in jail (or "camp" as he thinks of it).
The rest of "them" wont do a single day in prison.
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.)