IRS Confirms Some Internet Theft Losses Are Permitted Post-TCJA But Risks Remain
By Matthew L. Roberts on March 26,2025
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Matthew L. Roberts
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Fraud and theft continue to rise in the United States. According to a recent FTC report, Americans lost more than $12.5 billion from fraud in 2024 (an increase of 25% from the prior year). The FBI confirmed the upward trend in early 2024, noting “an alarming increase[ ] in both the frequency and financial impact of online fraud perpetrated by cybercriminals.”
Unfortunately, fraud victims must navigate a complex and confusing labyrinth of tax rules to determine whether they may claim a theft loss deduction. In addition to meeting a litany of requirements applicable to theft losses generally, they taxpayers must also ensure that they do not run afoul of the Tax Cuts and Jobs Act of 2017 (TCJA) limitations on certain theft losses. I’ve spoken on these tax issues in prior articles, including here and here.
On March 14, 2025, IRS Chief Counsel provided fraud victims with some good news. In a legal memorandum, the agency concluded that taxpayers may claim theft losses post-TCJA provided they have a profit motive in entering into the fraudulent transaction. The memorandum distinguishes between deductible theft losses (i.e., attempting to secure IRA funds or entering into an investment scheme) from non-deductible theft losses (i.e., romance and kidnapping scams). My recent Forbes article discusses the memorandum in greater depth and can be found here.
Although the non-binding memorandum is welcome news, taxpayers should still consult with their tax professional prior to claiming a theft loss. Whether a taxpayer qualifies for a theft loss deduction depends, as the IRS Chief Counsel memorandum cautions, on the particular facts and circumstances. Therefore, taxpayers should discuss, at a minimum, the following topics with their tax professional in determining whether to claim a theft loss:
Unfortunately, fraud victims must navigate a complex and confusing labyrinth of tax rules to determine whether they may claim a theft loss deduction. In addition to meeting a litany of requirements applicable to theft losses generally, they taxpayers must also ensure that they do not run afoul of the Tax Cuts and Jobs Act of 2017 (TCJA) limitations on certain theft losses. I’ve spoken on these tax issues in prior articles, including here and here.
On March 14, 2025, IRS Chief Counsel provided fraud victims with some good news. In a legal memorandum, the agency concluded that taxpayers may claim theft losses post-TCJA provided they have a profit motive in entering into the fraudulent transaction. The memorandum distinguishes between deductible theft losses (i.e., attempting to secure IRA funds or entering into an investment scheme) from non-deductible theft losses (i.e., romance and kidnapping scams). My recent Forbes article discusses the memorandum in greater depth and can be found here.
Although the non-binding memorandum is welcome news, taxpayers should still consult with their tax professional prior to claiming a theft loss. Whether a taxpayer qualifies for a theft loss deduction depends, as the IRS Chief Counsel memorandum cautions, on the particular facts and circumstances. Therefore, taxpayers should discuss, at a minimum, the following topics with their tax professional in determining whether to claim a theft loss:
- Is my loss a “theft” as that term is used in section 165(c)? See Rev. Rul. 2009-9 (taxpayer must show sufficient facts to demonstrate a theft occurred under applicable law).
- What tax year may I claim the theft loss? See I.R.C. § 165(e) (loss sustained in tax year in which taxpayer discovers the theft); Treas. Reg. § 1.165-1(d) (disallowing theft loss deduction to the extent there is a reasonable prospect of recovery).
- What is the amount of my theft loss deduction? See I.R.C. § 165(b) (theft loss limited to amount of adjusted basis in stolen funds or property).
- What is the character of the theft loss, i.e., ordinary or capital?
- If the theft loss is not fully utilized in the claimed tax year, what impact, if any, will the theft loss have on future tax years?
- If challenged by the IRS, what facts and circumstances can I show the agency to support my claim of profit motive?
- What penalties potentially apply if I claim a theft loss deduction but later discover I am not entitled to it or claimed it in the wrong tax year? See I.R.C. § 6662(a) (20-percent penalty for inaccurate returns).
- Are there any steps I should take now to potentially reduce my likelihood of penalties for claiming a theft loss deduction (i.e., making an adequate disclosure or seeking a tax opinion).
