Scam victims may have to pay IRS taxes on stolen money. Here’s why

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Fraud victims sometimes face a second financial blow: They have to pay taxes on the stolen money.

Since 2018, due to a temporary change under the Tax Cuts and Jobs Act of 2017, fraud victims have faced restrictions on claiming their losses as a deduction on their tax returns. President Donald Trump’s Big Beautiful Bill, signed into law last year, made the change permanent.

According to an IRS memorandum issued in March 2025, although losses from investment fraud may be deductible, monetary losses from other frauds – such as impersonation or romance scams – are not deductible, experts say.

Additionally, if the victim accessed a tax-advantaged 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. And if the victim is younger than 59½, an early repayment penalty of 10% may be imposed.

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A bipartisan bill in Congress aims to change the tax treatment of these losses. H.R. 9500, also called the Tax Relief for Fraud Victims Act, would, among other provisions, repeal deductibility limitations and waive the 10% penalty if it applies.

“Not being able to claim a theft loss deduction is very criminal,” said Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas.

The bill passed the House Ways and Means Committee on July 1 by a vote of 39-0. It is uncertain when and whether 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 increase. In 2025, consumers reported $15.9 billion in fraud losses to the FTC – the highest on record and an increase of about 27% from $12.5 billion in 2024. Since 2020, reported losses have increased nearly 430%, according to the FTC.

According to the FTC’s most recent data, scams were the most commonly reported type of fraud last year. While 80% of the roughly 1 million who filed a fraud report against scammers lost no money, the other 20% lost a total of $3.5 billion, FTC data shows. Investment scams led to the largest reported losses, at more than $7.9 billion.

The overall growth in fraud losses is driven by a surge in the share of consumers reporting they have been defrauded of $100,000 or more – a trend that is most common among adults age 60 and older, according to the FTC.

“This is generally because retirement accounts are being cashed out,” said Clark Flynt-Barr, AARP director of government affairs for financial security.

According to the FTC’s 2025 Annual Report to Congress released in December, losses of six figures or more in this age group amounted to $1.6 billion – 68% – of the reported losses of $2.4 billion in 2024.

How the law changed

Prior to 2018, taxpayers generally could claim itemized deductions for unreimbursed personal injury damages – such as from a weather event – and theft damages, subject to certain parameters, such as: B. the possibility of deducting only the amount of damage that exceeds 10% of the taxpayer’s income.

However, the TCJA changed the rules by limiting the deductibility of such losses to those resulting from a federally declared disaster. The provision, originally intended to apply only to tax years 2018 to 2025, was made permanent last year as part of the Big Beautiful Bill, which expanded eligibility to state-declared disasters.

Regardless, amounts lost through investment fraud may be deductible because there was a profit motive on the part of the investor, which is treated differently in the theft and loss section of the tax code, experts said.

“That’s another really frustrating part of this whole scenario,” Flynt-Barr said. “Victims need to be victims of the right kind of fraud.”

Bill would restore the deduction and add more protections

The new bill would remove the catastrophic limitation for both personal injury and theft damage.

“The deduction is being reintroduced to provide relief for fraud victims to deduct the amount stolen from them, thereby mitigating much of the tax impact,” Flynt-Barr said.

The bill would also give victims more flexibility by allowing taxpayers to deduct their theft losses for the tax year in which the losses occurred, rather than the year in which the fraud was discovered. Under current law, victims who are entitled to a deduction generally must apply it to their income for the year in which the fraud was discovered if it is determined to be a fraud involving funds that were taxed in a prior year, Roberts said.

“Many taxpayers who are retired may have no taxable income in future years after the theft, especially if they have lost their retirement funds,” Roberts said.

In addition to waiving the 10 percent early withdrawal penalty in situations where it would otherwise apply, the bill would also allow victims to more easily replace funds withdrawn from retirement accounts, which can currently be difficult due to contribution limits and other rules, experts said.

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