Are Your Scam Losses Tax Deductible?

An IRS chief counsel recently issued advice (CCA-2025-11015) that describes five situations in which taxpayers were victimized by scammers.

1. The Compromised account scam. The taxpayer transferred funds from retirement and nonretirement accounts to new so-called investment accounts, ostensibly to protect the taxpayer’s investments.
2. The “Pig butchering” scam. The taxpayer was tricked into investing in a fraudulent cryptocurrency platform that initially appeared to be profitable.
3. The Phishing scam. Similar to the compromised account scam, except that the taxpayer was tricked into providing usernames and passwords so the scammer could log in to steal the investments.
4. The Romance scam. The taxpayer developed a virtual romantic relationship with the scammer who convinced the taxpayer to transfer funds to help a relative in need of medical care.
5. The Kidnapping scam. The taxpayer transferred money to an overseas account to rescue a grandson who was believed to be kidnapped for ransom.

Common to all of these cases was that the scammer’s true identity was unknown, the theft losses were irreversible and it was not covered by insurance.  Also, no legal recourse was available, and law enforcement said there was no prospect of recovery. All of the victims transferred or gave access to their funds through fraud and deceit that constituted criminal fraud, larceny, or embezzlement under the laws of the states where the victims resided.

The IRS concluded that the theft losses were deductible for taxpayers 1, 2, and 3 because they incurred the losses in transactions entered into for profit under §165(c)(2). The motives of these taxpayers were to safeguard their existing investments or to engage in new investments. Thus, they had a profit motive when they authorized distributions or transfers or access to their funds. The losses are deductible in the year all of the scams occurred and are generally limited to the taxpayer’s basis in the assets.

On the other hand, the theft losses are not deductible for taxpayers 4 and 5 because they did not incur the losses in transactions entered into for profit. The motives of these taxpayers in transferring their funds were to provide aid or protection to others. Under the TCJA, their losses are nondeductible personal casualty losses.

Be careful out there.