Ian Buksunski wrote an article for the CPA Journal titled “Theft Loss Deductions Under the Tax Cuts and Jobs Act of 2017.”
In this piece, Ian discusses the Tax Cuts and Jobs Act of 2017 (TCJA) and the impact it has had on tax relief for individual taxpayers who are victims of scams. This is particularly relevant because financial fraud is on the rise.
Per the Federal Trade Commission, Americans lost over $4.6 billion to investment scams in 2024. Total fraud losses exceeded $10 billion in 2023, a 14% increase from reported losses in 2022. Scams and fraud are more sophisticated and far-reaching than ever, further aided by the rise of easy access to AI-driven voice simulators and video generation.
Before the TCJA, if a fraud victim could not recover their stolen funds, they could seek tax relief in the form of theft loss deductions by deducting their unreimbursed personal theft losses from their income.
The TCJA made significant changes to the theft loss deduction. Under §165(h)(5)(A), personal theft and casualty losses were drastically limited compared to the pre-TCJA rule: individuals can only deduct personal casualty losses after December 31, 2017 and before January 1, 2026 if their losses are attributable to federally declared disasters. As Ian explains in the article, “As of January 1, 2018, theft loss is, therefore, no longer generally deductible under IRC section 165.”
There is a narrow exception for individuals who had personal casualty gains in the same year, such as overpayment from insurance. There is also an exception under §165(c)(2)-(3) for victims of Ponzi schemes and victims of scams where they were promised a return on their investment.
However, other financial fraud scams are no longer covered, causing potential issues for individuals who were scammed in ways where no return was promised (such as romance or kidnapping scams). Given the increase in financial fraud in the 2020s and the uncertainty over whether these TCJA provisions will be renewed, this is now a major tax controversy issue.
While these narrow exceptions may help some fraud victims seek relief, practitioners may have to deliver bad news to their clients who lost large sums of money to scams. However, Ian says, “Advisors should also always check the state rules on this topic, as certain states have more permissible deduction policies than the current version of IRC section 165. Even if a loss cannot be claimed federally, it may still be applied against a taxpayer’s state income tax in certain cases.”
You can read the complete article here.
About Ian
Ian focuses his practice on tax controversy, complex commercial disputes, and government investigations.
