Can You Write Off Theft on Taxes? How to Claim a Deduction

Unexpected theft can result in significant financial loss, leaving many wondering if they can claim a tax deduction to offset some of the damage. While theft losses were once commonly deductible, recent changes in tax laws have made it more difficult for most individuals to qualify.

Understanding when theft losses are deductible and how to properly claim them is essential to avoid mistakes on your tax return.

Qualifying Theft Loss Criteria

To qualify for a deduction, the loss must meet the IRS definition of theft, which includes larceny, burglary, embezzlement, and fraud. Accidental loss or misplacement of property does not qualify. The IRS defines theft as the unlawful taking of money or property with criminal intent, meaning the loss must result from an illegal act under state or federal law.

The nature of the crime matters. If someone deceives you into handing over money voluntarily, it may not qualify as theft unless it meets the legal definition of fraud. Ponzi scheme victims can claim a theft loss deduction only if the perpetrator has been charged or convicted of fraud. Similarly, if an employee steals from a business, the employer must provide evidence such as financial records or police reports to support the deduction.

Determining the Deduction Amount

The deductible amount is based on the lesser of the property’s adjusted basis (original purchase price, adjusted for depreciation or improvements) or its fair market value immediately before the theft.

Any insurance payout or restitution must be subtracted from the total loss before determining the deductible amount. If an insurance claim is pending, the deduction may need to be delayed until the final settlement. Personal-use property theft losses are subject to a $100 per-loss reduction and a further reduction of 10% of the taxpayer’s adjusted gross income (AGI). For example, if a taxpayer with an AGI of $50,000 suffers a $10,000 theft loss, only the amount exceeding $5,100 ($10,000 – $100 – $5,000) is deductible.

Documentation Requirements

Proper documentation is essential. Taxpayers should maintain records of the stolen property, including descriptions, estimated values, and purchase dates. Receipts, appraisals, or bank statements can support the deduction calculation. If the stolen asset had appreciated or depreciated over time, historical valuation records may be necessary.

A police report strengthens the claim by providing an official record of the theft. The IRS may request this report during an audit. In cases of fraud or embezzlement, court documents, affidavits, or correspondence with attorneys may be required to confirm the criminal nature of the act.

Timing of the Claim

A theft loss deduction can only be claimed in the tax year when there is no reasonable prospect of recovering the stolen property. If legal proceedings, insurance claims, or restitution efforts are ongoing, the deduction must be deferred until those avenues are exhausted. Courts have ruled that claiming a deduction while still pursuing recovery is premature, as the final loss amount remains uncertain.

For thefts linked to federally declared disasters, different timing rules apply. The Tax Cuts and Jobs Act (TCJA) of 2017 restricted personal casualty and theft loss deductions to federally declared disaster areas through 2025. This means that unless the theft occurred as part of a qualifying event, individuals cannot claim the loss. Business-related thefts, however, remain deductible in the year of discovery, provided the taxpayer can prove the loss occurred in that period.

Insurance or Other Compensation

Before claiming a theft loss deduction, taxpayers must account for any insurance reimbursements or other compensation received. Any potential recovery must be deducted from the total loss before determining the allowable deduction. If an insurance claim is still pending at the time of filing, the deduction may need to be postponed until the final settlement.

If restitution is awarded through legal proceedings after a deduction has already been claimed, the recovered amount may need to be reported as income under the tax benefit rule. This prevents taxpayers from receiving a double benefit by deducting the loss in one year and recovering funds tax-free in another. If the recovery is less than the original deduction, only the excess amount is taxable.