If you’ve been the victim of a scam, you’re not alone—and there may be some financial relief available at tax time.
The IRS recently clarified how fraud victims can deduct certain losses on their taxes. While not every scam qualifies, some do, and understanding the rules could help you recoup part of your financial loss.
When You Can Claim a Deduction
According to new IRS guidance, if you moved your money intending to invest or protect your assets and ended up falling for a scam, you may be eligible to deduct the amount you originally invested (your “tax basis”) in the year you discovered the fraud.
This typically applies to scams like:
- Investment account takeovers
- Phishing attacks from fake financial institutions
- “Pig butchering” scams (where fraudsters gain trust over time before pushing fake investments)
In these cases, because your intent was tied to profit or protecting investments, the IRS generally allows you to deduct the original funds you lost.
When You Can’t Claim a Deduction
Unfortunately, not all scams are treated the same under the tax code. Losses from romance scams or kidnapping schemes don’t qualify for deductions, since these are categorized as “personal casualty losses,” which are not deductible unless tied to a federally declared disaster.
Also, if you withdrew money from a retirement account and sent it to a scammer, you’re still responsible for early withdrawal penalties, even if the money was lost due to fraud.
What You Need to Do
If you think you may be eligible to deduct a fraud loss, here are the steps to take:
- Verify the loss is non-recoverable.
You must prove the money is truly gone before claiming the deduction. - File a police report or official documentation.
The IRS requires proof that a theft occurred. - Determine your “tax basis.”
This means the original amount you transferred, not any additional gains or growth. - Consult with a tax professional.
These rules can get tricky. A pro can help ensure you’re filing correctly and maximizing any deductions you’re entitled to
IRS signals leeway for tax deductions for fraud victims | Accounting Today
