IRS Clarifies When Scam Losses Can Be Deducted on Tax Returns
A recent IRS legal memo clarifies that only victims of scams involving a profit motive—such as investment fraud or phishing schemes disguised as protective financial measures—may qualify for theft loss deductions on their tax returns. The memo emphasizes that losses from personal scams, like romance or fake kidnapping schemes, generally do not meet the criteria. Although scams are growing more sophisticated and costly—totaling $16.6 billion in 2024 according to the FBI—current tax law limits deductions to losses tied to transactions entered into for profit. National Taxpayer Advocate Erin Collins has urged Congress to expand tax relief to all scam victims and eliminate early withdrawal penalties for funds lost in such schemes.
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