The Tax Cuts and Jobs Act (TCJA) significantly restricted the types of theft losses that can be deducted on federal income tax returns. However, a recent Chief Counsel Advice memo (CCA 202511015) from the IRS offers new insight, suggesting that more fraud victims may qualify for theft loss deductions than previously thought.
Understanding Casualty and Theft Loss Deductions
The federal tax code allows individuals to deduct certain losses not reimbursed by insurance or other means. These include:
• Losses incurred in a business,
• Losses from transactions entered into for profit (outside of business activity), and
• Personal casualty or theft losses (not tied to business or profit-driven transactions).
Many fraud-related losses fall into the third category.
To qualify for a theft loss deduction, the taxpayer must generally prove:
• The loss resulted from conduct considered theft under state law, and
• There is no reasonable prospect of recovering the loss.
Under the TCJA (effective from 2018 through 2025), personal theft losses are deductible only if tied to a federally declared disaster, unless the loss occurred in a profit-driven transaction. As a result, many scam victims are only eligible for deductions if the funds lost were part of an investment or profit-motivated activity. This restriction has added financial insult to injury for victims of non-investment-related fraud.
Key IRS Rulings on Scam Scenarios
The IRS Chief Counsel memo examined several common scams and assessed whether victims had a valid profit motive, which was critical for deduction eligibility. Here's how each case was evaluated:
Compromised Account Scam
A scammer posing as a bank fraud specialist convinced the victim to transfer IRA and non-IRA funds into "safe" accounts, which were immediately drained.
Ruling: Because the funds were moved with the intent to reinvest, the loss was incurred in a profit-driven transaction and was deductible.
"Pig Butchering" Investment Scam
The victim was tricked into investing in fake cryptocurrency platforms. After transferring significant amounts from personal and retirement accounts, the victim could not withdraw funds.
Ruling: The investments were made with a clear intent to generate profit. The losses were deemed deductible.
Phishing Scam
The victim clicked a fraudulent link, granting the scammer access to their computer and investment account credentials. The scammer drained the accounts.
Ruling: The IRS determined that the stolen assets were tied to investment activity, making the loss deductible.
Romance Scam
The victim was manipulated into sending funds to cover the scammer's alleged medical bills. These transfers came from personal and retirement accounts.
Ruling: There was no intent to generate profit, so the loss was deemed nondeductible. Note: Had the scammer directed the victim to invest in a fake opportunity, the IRS likely would have treated the loss differently.
Kidnapping Scam
The victim, convinced a loved one was kidnapped, wired funds from retirement and personal accounts to a scammer overseas.
Ruling: Because the purpose wasn't profit-driven, the loss did not qualify for a deduction.
What This Means for Taxpayers
While the TCJA's theft loss limitations remain in place through 2025, this IRS memo indicates that victims of specific scams may still qualify for deductions if a profit motive can be established. Sometimes, taxpayers may be eligible to amend prior returns to claim these losses.
If you've been a victim of fraud and are unsure whether your loss qualifies for a deduction, contact us. We can help evaluate your situation and ensure proper documentation is in place to maximize your available tax relief.