IRS Tax Guidance for Scam Victims
A March 2025 legal memo from the U.S. Internal Revenue Service provides guidance on tax deductions for scam theft losses.
Note: Operation Shamrock does not provide legal advice and cannot advise whether you qualify for tax relief. We recommend that you speak with a qualified professional.
Good news: Some scam victims are eligible to take deductions for losses from investment scams. Prior to the Internal Revenue Service memo (ILM 202511015) released on March 14, it was unclear whether scam losses were allowed.
Key points
Investment scam victims may qualify to take theft-loss deductions.
An IRS memo identifies three types of scams that qualify for theft-loss deductions for the 2024 tax year.
The memo is helpful for victims to share with tax-preparation professionals.
In short, if victims of “pig butchering” scams can prove their profit motives, they may able to claim their losses as deductions. In other situations, such as personal business loss, the losses are not deductible according to something called the Tax Cuts and Jobs Act.
“The IRS’s compassion for scam victims should help drive voluntary compliance because the agency won’t appear to be adding extra pain to those already in distress,” according to Alyssa Maloof Whatley, as quoted in a post on Tax Notes.
The IRS memo reviews five types of scams, identifying three eligible for reporting as losses.
Compromised account scam: The scammer convinces the victim that someone is committing fraud in an attempt to steal their money. They then persuade the victim to transfer their assets into new investment accounts controlled by the scammer.
Pig butchering: The scammer befriends the victim and earns their trust. At that point, they offer them an exclusive opportunity to invest (usually in cryptocurrency) for huge gains. The scammers use sophisticated websites to convince the victim that they’re making gains and encourage them to invest more and more money.
Phishing: The victim receives an email, often appearing to be from their own bank or credit card provider, that leads them to fake websites. The scammers steal the victim’s account information and passwords, and then withdraw the funds before disappearing.
Romance scam: The scammer builds a fake online relationship with the victim and eventually asks for money, often to help a sick relative who doesn’t exist.
Kidnapping scam: The scammers call the victim and demand ransom for a grandchild or other loved one that they’re pretending to hold hostage. Some use artificial intelligence technology to mimic the hostage’s voice.
The common thread to all five is that, in the end, the scammers disappear with the money. The memo defines the first three as eligible for theft loss deductions. The IRS considered the romance and kidnapping scams as “theft by false pretenses” and the losses as personal, which means they’re not eligible for the deduction.
The Tax Cuts and Jobs Act provisions expire in 2025, so there will likely be more reviews and changes before the 2025 tax year.
Learn More
View the Allowance of Theft Losses for Victims of Scams Under I.R.C. Section 165 memo from the IRS site.
Read more about tax issues “The Hidden Tax Burden of Cybercrime: Why Victims Are Paying Twice” from FightCybercrime.org.