Theft Loss Deductions For Scam Victims: IRS Guidance

As tax professionals, we often hear from clients who have been defrauded in various scams, wondering if they can claim a “theft loss deduction” on their tax returns. The IRS issued Chief Counsel Advice (CCA 202511015) on January 17, 2025, clarifying how taxpayers who fall victim to scams may—or may not—be able to deduct their losses under Internal Revenue Code (IRC) Section 165.

Here’s what you need to know about theft loss deductions and whether your losses qualify for tax relief.

What Is a Theft Loss Deduction?

Under IRC Section 165, taxpayers can claim a deduction for theft losses if:

1. The loss results from an illegal taking of property under state law.
2. The taxpayer discovers the theft in a specific year and has no reasonable prospect of recovery.
3. The loss arises from a transaction entered into for profit (not a personal expense).

The illegal taking and removal of money or property must be illegal under state law and done with criminal intent.

Who Can Deduct a Theft Loss?

The deduction does not apply to all types of theft loss.

Losses That Qualify For A Deduction

If you suffered losses due to a scam that involved an investment or other profit-seeking transaction, you may be able to deduct it in the year of discovery. Here are some examples where theft losses were deductible:

1. Investment scams: A taxpayer invested in what they believed was a legitimate financial opportunity, but fraudsters stole the funds. These can be complex scams that involve grooming, initial investment and other steps that elevate the financial commitment and eventual loss.
2. Compromised account scams: A scammer gains unauthorized access to the victim’s accounts. This can involve convincing a taxpayer to transfer their investment funds under false pretenses using phishing, tricking them into revealing passwords or hacking a weak password. This action gives them unauthorized access to bank accounts.
3. Unauthorized account transfers: Once a fraudster hacked or phished a taxpayer’s investment or retirement account, they make unauthorized transfers that are often untraceable.

Key takeaway: If a fraudster stole your funds as part of an investment or profit-seeking activity, the IRS may allow you to claim a theft loss deduction under IRC 165(c)(2).

Losses That Are NOT Deductible

Unfortunately, not all scam-related losses are created equal or deductible. The Tax Cuts and Jobs Act (TCJA) of 2017 disallowed most personal casualty losses from 2018 through 2025 unless it involved a federally declared disaster. Victims cannot deduct losses that are purely personal in nature, including:

1. Romance scams: Often started on dating apps or other online platforms, a scammer deceived the victim into sending money for personal reasons (e.g., fake medical emergencies).
2. Kidnapping or emergency scams: A scammer used threats or impersonated a loved one to extort money.
3. Fake IRS or law enforcement scams: The scammer tricked you into sending money by falsely threatening arrest or legal action.

Key takeaway: If your loss was personal and unrelated to a profit-seeking transaction, you cannot claim a tax deduction under current IRS rules.

What About Ponzi Scheme Losses?

Some investment scams resemble Ponzi schemes, which have a special safe harbor under Revenue Procedure 2009-20. For a loss to qualify, the fraud must meet specific requirements, including:

1. A “lead figure” (i.e., the scammer) must have been indicted or criminally charged.
2. The fraud must have been an investment scheme where money from new investors paid earlier investors.

The victim must claim their deduction the year they discovered the loss. Taxpayers deduct 75% of losses if they pursue third-party recovery efforts and 95% if they do not.

How To Claim A Theft Loss Deduction

If you believe your loss is deductible, here’s what you should do:

1. Verify eligibility: This avoids unnecessary work and expense.
2. Calculate the loss: For personal use property, it is the lesser of the amount initially paid or the value lost due to the theft. For profit-related property, it is the amount paid initially (on an adjusted basis). Also, subtract any insurance reimbursements.
3. Gather evidence: Keep records of financial transactions, police reports and communications with the scammer.
4. Confirm there’s no prospect of recovery: If there’s a chance you could get the money back (e.g., through insurance or legal action), the loss is not yet deductible.
5. File IRS Form 4684: Theft losses from investment fraud should be reported under Section B (Business and Income-Producing Property on this form.
6. Consult a tax attorney: Given the complexities of Section 165 and theft loss deductions, legal guidance is crucial to ensure compliance.

While this guidance is currently up to date, it’s always advisable to work with a tax law lawyer to best ensure there have been no changes to applicable laws.

How We Can Help

At Goldburd McCone LLP, we specialize in tax litigation, IRS disputes and complex deduction claims. We provide:

1. Case analysis: We’ll evaluate your situation to determine if your loss is deductible.
2. Tax compliance & filing: We ensure you meet all IRS requirements and file the necessary forms correctly.
3. IRS representation: If the IRS challenges your deduction, we can defend your claim and represent you in audits or appeals.
4. Recovery strategies: If there’s a chance to recover your lost funds, we’ll guide you through legal avenues to maximize your financial outcome.

If you’ve been a victim of fraud and want to explore your tax options, our experienced tax attorneys are here to help.

Contact The Firm Today

If you’ve been a victim of fraud and want to explore your tax options, contact our experienced tax attorneys today. We can help determine whether your losses are deductible and ensure you comply with IRS regulations.