Are Losses From Scams Tax Deductible?

Financial losses from scams can be significant, leaving victims uncertain about potential tax relief. The ability to deduct such losses on a tax return has evolved over time, reflecting changes in tax law and the increasing sophistication of fraudulent schemes. Understanding the current rules requires navigating specific Internal Revenue Service (IRS) regulations and legislative adjustments. Historically, taxpayers had more flexibility in claiming deductions for various personal financial setbacks. This article will provide clarity on the present landscape for deducting losses incurred from scams.

Current Rules for Scam Loss Deductions

The deductibility of personal financial losses due to scams underwent a significant change with the Tax Cuts and Jobs Act (TCJA) of 2017. For tax years 2018 through 2025, personal casualty and theft losses, including losses from scams, are not deductible. This restriction applies unless the loss is directly attributable to an event in a federally declared disaster area. This change aimed to simplify the tax code and was accompanied by an increase in the standard deduction, reducing the number of taxpayers who itemize deductions.

A federally declared disaster is an event for which the President of the United States declares an area eligible for federal assistance, such as a major disaster or an emergency declaration. Examples include hurricanes, floods, wildfires, or tornadoes. If a personal scam loss occurs outside of such a declared disaster area, it is generally not deductible under current law.

Business losses from scams operate under different rules and generally remain deductible. These losses are considered ordinary business expenses and are treated differently from personal losses. If a scam impacts a business or an income-producing activity, such as an investment scam where there was an intent to generate profit, the losses may still be deductible.

The IRS has clarified through recent guidance that a profit motive can be established in certain scam situations, even if it’s not a traditional investment. For example, if a scammer manipulates a taxpayer into moving money under the false belief that they are protecting it, and that money was held in investment accounts, the loss might be deductible if a profit motive can be shown. However, personal scams like romance scams or false kidnapping schemes, where no profit motive exists, typically do not qualify for a deduction under the TCJA’s restrictions.

Defining a Tax-Deductible Theft

For a loss to qualify as a “theft” for tax purposes, the Internal Revenue Service (IRS) has a specific definition. Theft encompasses any illegal taking of money or property with criminal intent, as defined by the law of the state where the incident occurred. This definition is broad and extends beyond simple larceny to include embezzlement, blackmail, fraud, and obtaining money by false pretenses.

The critical element is that the taking must be illegal under state law and carried out with criminal intent. For instance, if someone is defrauded through a fraudulent scheme, and that scheme constitutes a crime like fraud or false pretenses in their state, it generally meets the IRS’s definition of theft. The loss is typically considered to be sustained in the taxable year the taxpayer discovers the theft.

While the IRS defines “theft” broadly, it is important to remember that this definition alone does not guarantee deductibility for personal losses. As previously noted, for tax years 2018 through 2025, personal theft losses are only deductible if they arise from a federally declared disaster. Business losses resulting from such defined “thefts” continue to be generally deductible as ordinary business expenses.

Required Documentation and Reporting

For any scam loss that qualifies for a tax deduction, such as a business loss or a personal loss in a federally declared disaster area, meticulous documentation is necessary. Taxpayers must gather evidence to substantiate the loss, its amount, and the fact that it resulted from a theft or casualty. This includes police reports or other official documentation confirming the criminal nature of the event. While specific state laws are not mentioned by name, the requirement for criminal intent under state law means that a police report or similar official record indicating an investigation or charges related to the scam can be highly beneficial.

Evidence of the financial loss itself is also crucial. This might include bank statements, credit card statements, transaction records, emails, or any other communication with the scammer that demonstrates the transfer of funds or property. Proof of ownership and the value of the lost assets, such as purchase receipts, appraisals, or before-and-after valuations, are also important. If any insurance or other reimbursement was received, or is expected, that amount must be subtracted from the total loss.

Qualifying losses are reported on IRS Form 4684, Casualties and Thefts. This form has different sections for personal-use property (Part A) and business or income-producing property (Part B). The calculated loss from Form 4684 is then typically carried over to Schedule A (Form 1040), Itemized Deductions, for individuals.