The Tax Cuts and Jobs Act (TCJA) significantly limited the types of theft losses that are deductible on federal income taxes. But a recent “advice memo” (CCA 202511015) from the IRS’s Office of Chief Counsel suggests more victims of fraudulent scams may be able to claim a theft loss deduction than previously understood.
Casualty loss deduction basics
The federal tax code generally allows individuals to deduct the following types of losses, if they weren’t compensated for them by insurance or otherwise:
- -Losses incurred in a business,
- -Losses incurred in a transaction entered into for profit (but not connected to a business), or
- -Losses not connected to a business or a transaction entered into for profit, which arise from a casualty or theft loss (known as personal casualty or theft losses).
A variety of fraud schemes may fall under the third category.
To deduct a theft loss, the taxpayer/victim generally must establish that:
- -The loss resulted from conduct that’s deemed theft under applicable state law, and
- -The taxpayer has no reasonable prospect of recovery of the loss.
From 2018 through 2025, though, the TCJA allows the deduction of personal casualty or theft losses only to the extent of personal casualty gains (for example, an insurance payout for stolen property or a destroyed home) except for losses attributable to a federally declared disaster. As a result, taxpayers who are fraud victims generally qualify for the deduction only if the loss was incurred in a transaction entered into for profit. That would exclude the victims of scams where no profit motive exists. The loss of the deduction can compound the cost of scams for such victims.
The IRS analysis
The IRS Chief Counsel Advice memo considers several types of actual scams and whether the requisite profit motive was involved to entitle the victims to a deduction. In each scenario listed below, the scam was illegal theft with little or no prospect of recovery:
Compromised account scam. The scammer contacted the victim, claiming to be a fraud specialist at the victim’s financial institution. The victim was induced to authorize distributions from IRA and non-IRA accounts that were allegedly compromised and transfer all the funds to new investment accounts. The scammer immediately transferred the money to an overseas account.
The IRS Chief Counsel found that the distributions and transfers were made to safeguard and reinvest all the funds in new accounts in the same manner as before the distributions. The losses, therefore, were incurred in a transaction entered into for profit and were deductible.
“Pig butchering” investment scam. This crime is so named because it’s intended to get every last dollar by “fattening up” the victim with fake returns, thereby encouraging larger investments. The victim here was induced to invest in cryptocurrencies through a website. After some successful investments, the victim withdrew funds from IRA and non-IRA accounts and transferred them to the website. After the balance grew significantly, the victim decided to liquidate the investment but couldn’t withdraw funds from the website.
The Chief Counsel determined that the victim transferred the funds for investment purposes. So, the transaction was entered into for profit, and the losses were deductible.
Phishing scam. The victim received an email from the scammer claiming that his accounts had been compromised. The email, which contained an official-looking letterhead and was signed by a “fraud protection analyst,” directed the victim to call the analyst at a provided number.
When the victim called, the scammer directed the victim to click a link in the email, giving the scammer access to the victim’s computer. Then, the victim was instructed to log in to IRA and non-IRA accounts, which allowed the scammer to grab the username and password. The scammer used this information to distribute all the account funds to an overseas account.
Because the victim didn’t authorize the distributions, the IRS weighed whether the stolen property (securities held in investment accounts) was connected to the victim’s business, invested in for profit, or held as general personal property. The Chief Counsel found that the theft of property while invested established that the victim’s loss was incurred in a transaction entered into for profit and was deductible.
Romance scam. The scammer developed a virtual romantic relationship with the victim. Shortly afterwards, the scammer persuaded the victim to send money to help with supposed medical bills. The victim authorized distributions from IRA and non-IRA accounts to a personal bank account and then transferred the money to the scammer’s overseas account. The scammer stopped responding to the victim’s messages.
The Chief Counsel concluded that this loss wasn’t deductible. The victim didn’t intend to invest or reinvest any of the distributed funds, so there was no profit motive.
Note: If the scammer had directed the victim to a fraudulent investment scheme, the results likely would’ve been different. The analysis, in that situation, would mirror that of the pig butchering scheme.
Kidnapping scam. The victim was convinced that his grandson had been kidnapped. He authorized distributions from IRA and non-IRA accounts and directed the funds to an overseas account provided by the scammer.
The victim’s motive wasn’t to invest the distributed funds but to transfer them to a kidnapper. Unfortunately, these losses were also nondeductible.
What’s next?
It’s uncertain whether the TCJA’s theft loss limit will be extended beyond 2025. In the meantime, though, some scam victims may qualify to amend their tax returns and claim the loss deduction. Contact the tax experts at The CJ Group if you need assistance or have questions about your situation.
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