Do You Have to Report Stolen Goods to the IRS?

The Internal Revenue Service (IRS) operates on the principle that all income, regardless of its origin, is subject to reporting. This broad definition extends to the proceeds of criminal activities, including the value of stolen property. For both the person committing a theft and the victim, the tax code has specific provisions that dictate financial responsibilities and potential relief. The regulations address the thief’s obligation to declare their illicit gains and the victim’s ability to claim a deduction under certain circumstances.

The Tax Obligation for Stolen Property

The foundation of the U.S. tax system is that all income is taxable unless a specific exemption exists. The IRS extends this principle to include earnings from illegal activities. According to IRS Publication 17, if an individual steals property, they are required to report its value as income for the year in which the theft occurred. This requirement has been a long-standing component of U.S. tax law, establishing that illegal gains are not exempt from taxation.

The amount of income the thief must report is based on the property’s fair market value (FMV) at the moment it was stolen. FMV is defined as the price the property would sell for on the open market. This value is considered income and must be included on the thief’s tax return, on Schedule 1 (Form 1040) as “Other Income.”

The tax code also addresses situations where a thief returns the stolen item. If the stolen property is returned to its rightful owner in the same year it was taken, the thief is not required to report its value as income. Should the property be returned in a subsequent year, the thief cannot amend the prior year’s return. Instead, they may be able to claim a deduction in the year of the return for the amount they previously included in their income.

This reporting requirement serves a practical purpose for law enforcement and the IRS. It provides a legal basis for prosecuting criminals for tax evasion, even if the underlying crime is difficult to prove. The Fifth Amendment right against self-incrimination does not excuse a person from filing a tax return; it allows them to report income from illegal sources without detailing the specific criminal act.

Theft Loss Deductions for Victims

While the thief is responsible for reporting stolen property as income, the victim of the theft may have an opportunity to receive some tax relief. The tax code permits deductions for losses related to thefts, though the rules have become more restrictive for individuals. The ability to claim a deduction depends on whether the stolen property was for personal or business use and where the theft occurred.

For individuals, the Tax Cuts and Jobs Act of 2017 (TCJA) significantly altered the rules for deducting personal theft losses. For tax years 2018 through 2025, the deduction for personal casualty and theft losses is suspended. This means if personal property, such as jewelry or a car, is stolen, you generally cannot claim a deduction for that loss on your federal tax return.

An exception to this suspension applies to losses that occur in a federally declared disaster area. If the President declares a major disaster, individuals who suffer theft losses directly attributable to that event may still be eligible to claim a deduction. This provision is designed to provide financial assistance to those affected by large-scale events like hurricanes, floods, or wildfires.

The rules are different for businesses. If property used in a trade or business is stolen, the business can still deduct the loss. This applies to assets such as company vehicles, equipment, inventory, or cash. This distinction means that a self-employed individual or a corporation that has property stolen can generally claim a deduction, while an individual experiencing a similar loss with personal property cannot, outside of the disaster area exception.

Information Needed to Document a Theft Loss

For taxpayers who are eligible to claim a theft loss, such as a business or an individual in a federally declared disaster area, meticulous documentation is required. The IRS requires a clear record to substantiate the loss before any deduction can be taken. You will need to gather the following:

• A police report to document that a theft occurred. The report should include details about the date of the incident and the items that were stolen.
• Proof of your ownership of the stolen property and its adjusted basis. The adjusted basis is typically what you paid for it, plus any improvements, minus any depreciation.
• The property’s fair market value immediately before the theft. This can be established through appraisals or sales of comparable property.
• An accounting of any insurance or other reimbursement you received or expect to receive. The deductible loss must be reduced by the amount of any compensation.

Process for Reporting a Theft Loss

The final step is to report the theft loss on your tax return using IRS Form 4684, Casualties and Thefts. This form is used to calculate the amount of your deductible loss and must be filed with your annual income tax return, such as Form 1040 for individuals or Form 1120 for corporations.

Form 4684 is divided into sections to handle different types of losses. Section A is used for personal-use property, which currently applies almost exclusively to losses in a federally declared disaster area. For these disaster-related losses, there is a $500 reduction per casualty event, which is then further reduced by 10% of your adjusted gross income (AGI).

Section B of Form 4684 is designated for business or income-producing property. This is where a business would report a loss from the theft of its assets. The calculations in this section are different from those for personal losses and do not have the same AGI limitations. The deductible amount is generally determined by the property’s adjusted basis.

After completing Form 4684, the calculated loss is transferred to other parts of your tax return. For individuals with a qualifying disaster loss, the amount can be claimed as an itemized deduction on Schedule A (Form 1040). However, a special rule allows these taxpayers to deduct the loss even if they take the standard deduction. For businesses, the loss is reported on Form 4797, Sales of Business Property.