Scam victims face an unexpected tax burden that Congress now aims to fix. When someone steals your money or defrauds you, the IRS currently treats that loss as nondeductible, meaning you cannot claim it on your tax return. Worse, if a scammer takes your funds and the money passes through their hands into legitimate transactions, you may owe taxes on income you never actually received or controlled.
A House bill seeks to restore a rule that existed before 2018. That earlier rule allowed taxpayers to deduct theft losses and fraud losses on their tax returns, providing some financial recovery after being victimized. The Tax Cuts and Jobs Act of 2017 eliminated this deduction for individual taxpayers, though it remains available for businesses.
The timing matters. If you lost $10,000 to fraud, you currently have no way to offset that loss against your taxable income. A victim might also face tax liability if the stolen money was routed through a criminal's business and reported as income somewhere in the chain. This creates a double hit: you lose the money and owe taxes on it.
The proposed legislation addresses this gap. By restoring the deduction, victims could claim their losses on Schedule A, similar to casualty losses from natural disasters. The bill also contemplates additional protections for fraud victims, though specific provisions remain under discussion.
For savers and ordinary people, this change would restore fairness to the tax code. A retiree who loses $50,000 to a Ponzi scheme or a consumer defrauded by a fake investment opportunity could recoup part of the loss through tax relief. Small business owners already have this option, making the current rule inequitable for individual taxpayers.
The House bill has not yet passed, and Senate action remains uncertain. Nonetheless, the proposal reflects growing recognition that theft and fraud victims should not face additional tax penalties