Lost Money to a Scam? You May Be Able to Recover It on Your Taxes

Losing money to a scam is devastating. The financial hit, the embarrassment, the feeling of betrayal — it all adds up to one of the most stressful experiences a person can face. But here is something many scam victims do not realize: depending on your situation, you may be able to recover some of that lost money through your federal tax return.

This guide explains the basics of claiming scam losses on your taxes, what changed after the Tax Cuts and Jobs Act of 2017 (TCJA), and when it makes sense to talk to a licensed CPA who specializes in fraud-related tax recovery.

The Basics: Casualty and Theft Loss Deductions

For decades, the IRS allowed taxpayers to deduct losses from theft, fraud, and other crimes on their federal tax returns. This fell under what is known as the casualty and theft loss deduction, governed by Internal Revenue Code Section 165. The idea was straightforward: if someone stole your money or property, you should not have to pay taxes as if you still had it.

Before 2018, if you were scammed out of ten thousand dollars, you could potentially deduct that loss on your tax return, subject to certain limits and thresholds. You needed to itemize your deductions rather than take the standard deduction, and the loss had to exceed certain percentage-of-income floors, but the deduction was available to most victims.

What Changed With TCJA 2017

The Tax Cuts and Jobs Act, signed into law in December 2017, made sweeping changes to the tax code. One of the most significant for scam victims was the suspension of personal casualty and theft loss deductions for tax years 2018 through 2025. Under the TCJA, you can only claim a personal casualty or theft loss if the loss is attributable to a federally declared disaster.

This means that for most individual scam victims, the straightforward path to deducting a personal theft loss was temporarily eliminated. However, the word "temporarily" matters. The TCJA provisions are set to expire, and Congress will need to decide whether to extend, modify, or let them lapse.

What Still Qualifies Right Now

Even under the TCJA restrictions, there are several scenarios where scam victims may still be able to claim a deduction. These exceptions are critical to understand:

Investment Fraud Losses

If you lost money in an investment scam — such as a Ponzi scheme, a fraudulent investment fund, or a fake brokerage — your loss may qualify as an investment loss rather than a personal casualty loss. Investment losses are treated differently under the tax code and were not eliminated by the TCJA. The IRS has specific guidance on claiming theft losses from investment fraud, including Revenue Ruling 2009-9, which was issued after the Bernie Madoff scandal.

Business-Related Theft Losses

If the scam targeted your business or business assets, the loss may be deductible as a business expense. Business theft losses were not suspended by the TCJA. This can include situations where a contractor defrauded your small business or where business funds were stolen through a wire transfer scam.

Federally Declared Disaster Losses

Personal casualty losses are still deductible if they result from a federally declared disaster. While this exception does not apply to most scams, it is worth noting for completeness.

State Tax Deductions

Even if you cannot deduct a scam loss on your federal return, your state may still allow it. Several states did not conform to the TCJA changes and continue to allow theft loss deductions on state income tax returns. A CPA familiar with your state's tax code can help you determine if this applies to you.

The Role of Documentation

Regardless of which exception might apply to your situation, documentation is everything. The IRS will want to see evidence that a theft actually occurred, the amount of the loss, and that you had no reasonable prospect of recovery. This means police reports, bank statements, correspondence with the scammer, and any reports you filed with the FTC or IC3.

Start gathering this documentation as soon as possible after discovering you have been scammed. The more thorough your records, the stronger your tax claim will be. We cover this in detail in our guide on how to document a scam loss for your tax return.

When to Talk to a CPA

Tax law around fraud losses is genuinely complex. The interaction between the TCJA provisions, investment loss rules, state tax codes, and IRS documentation requirements creates a situation where professional guidance is not just helpful — it is often essential.

A CPA or Enrolled Agent who specializes in fraud-related tax issues can evaluate your specific situation, determine which deductions you may qualify for, and prepare the necessary forms correctly. The cost of a consultation is almost always worth it when significant losses are involved.

The team at ScamTaxHelp.com offers free initial consultations specifically for scam victims. They work with licensed CPAs who understand the unique challenges of documenting and claiming fraud losses, and they can help you determine whether your loss is potentially deductible under current law.

Do Not Give Up

Being scammed is not your fault, and you deserve to explore every avenue of recovery available to you. While the tax code has become more restrictive for individual theft losses, there are still legitimate paths to recovering some of what you lost. The key is understanding which rules apply to your situation and working with a professional who can guide you through the process.

Start by documenting everything. Then reach out to a qualified CPA. You may be surprised at what is possible.