Determine If Your Scammed Money is Tax Deductible:
If you’ve fallen victim to a scam and lost money, you’re probably wondering: Is scammed money tax deductible? The answer is complicated—and depends largely on why you fell for the scam.
According to recent IRS guidance, your motive matters. If you were trying to make money (a profit motive), your scam-related losses may be deductible. If you were trying to help someone, such as in a romance scam or kidnapping hoax, your losses are likely considered personal—and not deductible.
What Qualifies as a Theft Loss?
The IRS defines a theft loss as one caused by robbery, embezzlement, larceny, or fraud. You don’t need a criminal conviction or even charges filed—just proof that your money was stolen and that there’s no reasonable chance of recovering it.
Three Types of Theft Losses
- Business losses: Fully deductible as ordinary losses (reported on Form 4684).
- For-profit transactions: Losses from personal investments with a profit motive. Deductible as itemized deductions on Schedule A.
- Personal theft losses: Not deductible unless tied to a federally declared disaster.
Ken-Mar Tax helps business owners claim all the deductions they’re legally entitled to—and that includes loss recovery strategies.
Deductible Scam Losses: Examples with a Profit Motive
- Compromised account scam: Victim moved funds to a scammer’s account after being tricked into thinking their IRA was hacked.
- Pig butchering scam: Victim sent money to what appeared to be a profitable crypto investment site.
- Phishing scam: Scammer accessed login credentials to drain investment accounts.
In each of these examples, the IRS recognizes a profit motive, so the theft losses may be deductible.
Non-Deductible Scam Losses: Based on Emotion
- Romance scam: Victim transferred money for fake medical bills out of emotional connection—not profit.
- Kidnapping scam: Victim wired funds to “rescue” a loved one using AI voice cloning.
These losses are deemed personal and not tax deductible under the Tax Cuts and Jobs Act (TCJA) rules through at least 2025.
One Exception: Ponzi Scheme Losses
The IRS allows deductions for Ponzi scheme losses if the scammer has been criminally charged. Victims can deduct partial losses—even if they expect some recovery—under the Ponzi safe harbor rule.
Takeaways
- If you’re scammed while pursuing a profit, you may qualify for a theft loss deduction.
- Losses caused by compassion or emotional manipulation are not deductible under current law.
- Keep good records and work with a qualified tax advisor to understand your options.
Ken-Mar Tax can help you navigate complex deduction strategies and protect your finances—even when life throws you a curveball.
Wondering if your scam-related loss qualifies for a deduction?
Schedule a consultation with Ken-Mar Tax and let us help you think outside the block.
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