Here's a statement that might make your head spin: if you got scammed out of money because of greed, you might get a tax deduction. But if you got scammed because you were trying to help someone you love, you're out of luck tax-wise.
Welcome to the bizarre world of post-2017 tax law, where your motive matters more than your loss.
Scams Are Everywhere
Let's start with the harsh reality: scams are incredibly common. According to recent Federal Trade Commission data, consumers reported losing more than $12.5 billion to fraud in 2024. Investment scams alone accounted for $5.7 billion in losses—more than any other category. Older people are particularly vulnerable targets.
If you're reading this thinking, "This could never happen to me," think again. Scammers are getting more sophisticated every day, and no one is immune.
How Tax Law Changed Everything
In the past, if you were the victim of a scam, you could often deduct your losses as theft losses, subject to certain limits. It wasn't great consolation for being scammed, but at least Uncle Sam helped shoulder some of the financial burden.
Then came 2017 and the Tax Cuts and Jobs Act (TCJA), which changed everything. The TCJA added a harsh new rule: from 2017 to 2025, personal theft losses are deductible only if they're attributable to a federally declared disaster. For most scam victims, this means no deduction at all.
The Profit Motive Exception
But here's where it gets interesting. The law carved out an exception: thefts involving business property and those involving transactions entered into for profit are still deductible. If you can prove your loss arose from a for-profit transaction, you can claim it as a miscellaneous itemized deduction on Schedule A.
This is where your motive becomes crucial.
When Greed Actually Helps You
The IRS chief counsel has provided guidance on when common scams qualify for deductions, and the results are eye-opening:
Deductible Scams (Profit-Motivated)
- Compromised account scams — where scammers convince you to transfer money to "protect" your investment accounts
- Pig butchering investment scams — where scammers build relationships to lure you into fake investment opportunities
- Phishing scams — targeting your IRA and investment accounts
Why are these deductible? Because the victims had a profit motive—they were trying to earn investment returns or protect accounts established to generate profits.
Non-Deductible Scams (Personal Motives)
- Romance scams — where scammers prey on your emotions and desire for companionship
- Fake kidnapping scams — where scammers claim your loved one is in danger and needs money
These aren't deductible because the victims acted out of love or a desire to help others—noble motives, but not profit motives.
The Uncomfortable Truth
In short, losses due to scams that rely on the victim's greed are deductible. Losses from scams that count on the victim's love or desire to help others are not deductible.
This seems ridiculous, and frankly, it is. But it's the natural result of the harsh rule established by the TCJA. The IRS is trying to provide some relief by taking a relatively liberal view of what constitutes a "transaction entered into for profit," but the fundamental unfairness remains.
What This Means for You
If you've been the victim of a scam, don't assume your loss isn't deductible. Examine your motive carefully. Were you trying to make money or protect existing investments? You might have a case for a deduction.
Document everything about the scam—the promises made, your intentions, and the circumstances that led to your loss. This documentation could be crucial if you decide to claim the deduction.
The Bottom Line
Nobody wants to be scammed, but if it happens to you, understand that your motive matters for tax purposes. While the law seems to reward greed over goodwill, it's the reality we're working with until these TCJA provisions expire in 2025.
Stay vigilant against scams, but if you do fall victim, make sure you understand the tax implications of your loss.