LIFE IN BALANCE
Explaining Deductible vs. Non-deductible Scam Losses
The IRS has issued guidance stating that some scam-related financial losses may qualify for theft-loss deductions starting with the 2025 tax year. In certain circumstances, taxpayers may also be able to amend prior returns.
Under the Tax Cuts and Jobs Act (TCJA), deductions for theft, casualty, or similar losses are generally limited. An exception applies, however, when the loss stems from a transaction pursued for profit, for example, an investment fraud scheme. These deductible vs. non-deductible scam losses IRS rules are not subject to the same restrictions.
Conditions for Deductibility
To qualify for a deduction, the loss must meet all of the following. These rules help taxpayers distinguish deductible vs. non-deductible scam losses IRS guidance covers:
- It must fall under the legal definition of fraud or larceny in the applicable jurisdiction.
- It must represent a permanent loss, with little or no chance of recovery.
Scam Types Eligible for Deduction
Of the five scam categories outlined by the IRS, deductions apply only to these three. Understanding the rules around deductible vs. non-deductible scam losses IRS guidance is essential:
- Compromised Account – A fraudster poses as a security or fraud specialist, gains access to the taxpayer’s account, and removes funds.
- Pig Butchering Scheme – Victims are tricked into investing in fictitious assets (commonly cryptocurrency, gold, or real estate). Although fake account balances may appear online, no actual investment occurs, and the funds cannot be withdrawn.
- Phishing Scam – Victims provide account login details, which scammers then use to empty the accounts.
Scam Types Not Eligible for Deduction
Losses connected to the following scams are deemed personal and are therefore non-deductible. These fall under the IRS rules for deductible vs. non-deductible scam losses IRS guidance:
- Romance Scams – Money sent to individuals under the false pretense of a romantic relationship.
- Kidnapping/Relative Scams – Payments made in response to fraudsters pretending to be a grandchild or family member who has been kidnapped.
Key Distinction
The determining factor in deductible vs. non-deductible scam losses IRS guidance is whether the loss occurred in the context of seeking profit. Scam losses tied to investment activity are deductible, while personal-related scams are not.
Tax Considerations
Under the IRS rules for deductible vs. non-deductible scam losses IRS, taxpayers may still need to account for income, capital gains, or losses if assets were sold or distributions were made, depending on the type of account involved.
