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Internet Theft
Americans continue to lose money from fraud at alarming rates. According to a recent Federal Trade Commission (FTC) report, they reported losing more than $12.5 billion from fraud in 2025 (an increase of 25% from the prior year). The actual losses are almost certainly much higher.
In addition to the loss itself, Americans suffer from confusion concerning whether they may claim deductions as a result of the fraud. Indeed, there are a multitude of complex tax issues that arise from theft losses, such as timing and the limitations imposed on these losses after passage of the Tax Cuts and Jobs Act of 2017 (TCJA). For example, a fraud victim who withdraws funds from a taxable retirement account, losing those same funds to fraud, must wrestle with potential income recognition from the retirement account, whether the facts and circumstances support a theft loss, and, if so, the timing and character of the loss.
I’ve spoken on the federal tax consequences associated with fraud in many articles, including here and here. As a tax attorney, I started seeing a proliferation of these scams, often conducted online, during the onset of COVID-19. Unfortunately, I continue to see them today. I have counseled many clients on these issues, and IRS Chief Counsel has finally also weighed in, releasing a memorandum on March 14, 2025, that addresses some of these tax issues.
Theft Loss Deductions Generally
Theft loss deductions have always been tricky, even pre-TCJA. Generally, taxpayers could claim theft losses if they proved three requirements: (i) a theft occurred under governing law; (ii) the amount of the deductible loss, which was limited to basis in the stolen assets or funds; and (iii) the proper year to claim the loss, which was limited to when the theft was discovered and whether they had any reasonable prospect of recovery at the end of the year. Because these requirements were factually intensive, it was common for the IRS to challenge a taxpayer’s claim to a theft loss.
The TCJA raised additional hurdles to claim the deduction. Under the TCJA, taxpayers may no longer claim theft losses under section 165(c)(3) unless the taxpayer meets the qualifications under the personal casualty loss rules, including that the loss was attributable to a federally declared disaster area. In addition, the TCJA disallowed miscellaneous itemized deductions, which arguably may include some types of theft losses.
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