Scams are incredibly common. I have written about them in many newsletters.
According to recent data from the Federal Trade Commission, consumers reported losing more than $12.5 billion to fraud in 2024. They reported losing more money to investment scams—$5.7 billion—than any other category. Older individuals are particularly vulnerable to scams. We need to ensure that we protect our parents (if living) and siblings to the greatest extent possible!!
If you’re the victim of a scam, can you deduct your losses as a theft loss? In the past, you could often deduct losses due to fraud and larceny because they were considered theft losses, subject to certain limits.
All this changed in 2017 when Congress enacted the Tax Cuts and Jobs Act (TCJA). The TCJA added a new provision to the tax code. It provides that from 2017 to 2025, personal theft losses are deductible only if they are attributable to a federally declared disaster. This means almost all personal theft losses are not deductible at all during these years. Business theft loss deductions were unchanged.
But all is not necessarily lost for fraud victims. Thefts involving business property and those involving transactions entered into for profit are deductible without the need for a disaster. Thefts arising from for-profit activities are deductible as a miscellaneous itemized deduction on Schedule A, not subject to the 2 percent of adjusted gross income (AGI) floor.
Thus, if you’re the victim of a scam, you can get a theft loss deduction if it arose from a for-profit transaction.
The IRS Chief Counsel provides helpful guidance explaining when common scams are deductible. The scams clarified involve victims transferring money from their IRA and non-IRA accounts to scammers, typically overseas.
The IRS Chief Counsel advises that losses due to compromised account scams, “pig butchering” investment scams, and phishing scams are deductible. That is because the victims of these scams all have a profit motive. That is earning more investment returns or safeguarding IRA and non-IRA accounts established to earn a profit.
On the other hand, losses due to romance scams or fake kidnapping scams are not deductible as theft losses. That is because the victims voluntarily transferred their money to the scammers out of mistaken love or an intention to protect loved ones. Those are not profit-driven motives. Their losses were non-deductible personal theft losses.
In short, losses incurred due to scams that exploit the victim’s greed are deductible. Losses from scams that count on the victim’s love or desire to help others are not deductible.
This seems odd, but it is the natural result of the very harsh rule established by the TCJA, which states that personal theft losses are never deductible. The IRS Chief Counsel attempts to mitigate the harshness of this rule by adopting a relatively liberal interpretation of what constitutes a transaction entered into for profit.
If you want to discuss your theft loss or the loss suffered by a loved one, please contact me and we can set up a consultation. The timing and the substantiation of the loss can be complicated.