Scam victims may owe IRS taxes on stolen money. Here’s why
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Scam victims can sometimes suffer a second financial blow; They owe taxes on the stolen money.
Since 2018, fraud victims have faced restrictions on whether they can claim their losses as a deduction on their tax returns due to a temporary change made under the 2017 Tax Cuts and Jobs Act. The “big, beautiful bill” law that President Donald Trump enacted last year made this change permanent.
While investment fraud losses are tax deductible, IRS memorandum This is not the case with money lost in other scams, such as the fraud or romance scam published in March 2025, experts said.
Additionally, if the victim tapped a tax-deferred retirement account, such as a traditional 401(k), or individual retirement account as part of the fraud, income taxes may be due on the distribution. If the victim is under 59½ years of age, a 10% early withdrawal penalty may be applied.
A bipartisan congressional bill aims to change the tax treatment of these losses. called the Tax Relief for Fraud Victims Act. HR 9500 It would eliminate discount restrictions and waive the 10% penalty if applicable, among other provisions.
“Not being able to claim the theft loss deduction is very punitive,” said Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas.
The bill was approved by the House Ways and Means Committee on July 1 by a vote of 39-0. It is unclear when or if the full House will consider the measure.
Reported fraud has increased by almost 430% since 2020
According to the Federal Trade Commission, the amount of money lost to fraud continues to rise. Consumers reported in 2025: Fraud losses $15.9 billion Losses passed on to the FTC are the highest on record and a nearly 27% increase from $12.5 billion in 2024. Reported losses have increased nearly 430% since 2020, according to the FTC.
Last year, imposter scams ranked first most reported Type of fraud, according to the FTC’s latest data. According to data from the FTC, 80% of the nearly 1 million people who filed fraud scam reports lost no money, while the other 20% lost a total of $3.5 billion. Investment scams resulted in the largest reported losses of more than $7.9 billion.
The overall increase in fraud losses is driven by an increase in the share of consumers who say they have been scammed of $100,000 or more; This is the most common trend among adults ages 60 and older, according to the FTC.
“This is because retirement accounts in general are being converted to cash,” said Clark Flynt-Barr, AARP’s government affairs director for financial security.
According to the FTC’s 2025 report, losses of six figures or more in this age group amounted to $1.6 billion (68%) of the $2.4 billion in losses reported in 2024. annual report To Congress, published in December.
How has the law changed
Before 2018, taxpayers could generally claim itemized deductions for unreimbursed personal losses, such as weather events, and theft losses, subject to certain parameters, such as only being able to deduct the amount of the loss that exceeded 10% of the taxpayer’s income.
But the TCJA changed the rules by limiting the deductibility of such losses to losses resulting from federally declared losses. disaster. The provision, originally planned to apply only to tax years 2018 through 2025, was made permanent last year as part of the “big, beautiful bill” that also expanded eligibility to state-declared disasters.
Experts also said that amounts lost to investment fraud are tax deductible because the investor is seeking profit, which is treated differently under the theft-loss section of the tax code.
“This is another really frustrating part of the whole scenario,” Flynt-Barr said. “Victims need to fall victim to the right type of fraud.”
Bill would restore deduction, add other protections
The new bill would eliminate the disaster-related limitation for both personal losses and theft losses.
“This reintroduces the deduction to make it easier for fraud victims to deduct the amount stolen from them, thus mitigating many of the tax consequences,” Flynt-Barr said. he said.
The bill would also give victims more flexibility by allowing taxpayers to deduct theft losses for the tax year in which the losses occur, as opposed to the year in which the fraud occurs. Under current law, if fraud is found to have occurred with money taxed in the previous year, victims who qualify for the deduction generally must apply it to their income in the year the fraud was detected, Roberts said.
“Many retired taxpayers may not have taxable income for years to come after the theft occurs, especially if they lose their retirement funds,” Roberts said.
In addition to waiving the 10% early withdrawal penalty where it might otherwise apply, the bill would also allow victims to more easily replace funds withdrawn from retirement accounts, which can be difficult right now because of contribution limits and other rules, experts said.
