In March 2025 the IRS Office of Chief Counsel published a memorandum working through five hypothetical taxpayers who had lost money to scams the year before: a compromised-account scam, a pig-butchering investment scam, a phishing scam, a romance scam and a kidnapping scam.
Its conclusion draws one line. A theft loss is deductible where the taxpayer entered the transaction for profit, the conduct was theft under state law, and there is no reasonable prospect of recovery. That covers investment scams, and it covers the compromised-account case, where a scammer convinces you to move money under the false belief that you are protecting it.
Losses from scams with no profit motive, the romance and the kidnapping cases, are personal casualty losses, and the 2017 tax act suspended those through 2025 except for federally declared disasters. Same theft, same money, no deduction.
The loss is taken in the year the scam is discovered, not the year the money left.
It is guidance, not law, and it is United States federal tax only. What it settles is that the deduction turns on motive, not on method or amount, and that a deduction with no documented theft behind it is an audit. The documentation it needs is the file O101-01 told you to write.
Two actions remain that cost nothing and matter. Reporting is the first. The tax treatment is the second, and it is the one victims most often never hear about.
Why report, when nothing comes back
O101-02 was honest that the base rate is low. Report anyway, for four reasons that have nothing to do with getting the money back.
It is the input to every chokepoint. An exchange freezes on a law enforcement request, not on your email. An issuer wants a report number. A seizure, years later, returns funds to the victims on file. If you are not on file, none of those can reach you.
It produces a number. A police report number or an IC3 complaint reference is asked for by exchanges, by insurers where any cover exists, by tax preparers, and by anyone you later need to show that the loss was a crime rather than a bad trade.
It is the count. Your case will not be worked on its own. A hundred cases with the same receiving address might be. Yours becomes one of the hundred only if it is filed with the address in it.
It is the tell. Anyone who later tells you they can help and does not ask for the report number is not going to help.
Where
United States: the FBI's Internet Crime Complaint Center at ic3.gov. Also your local police, for a report number an exchange or a preparer may ask for, and the FBI field office if you are contacted by anyone claiming to be recovering the funds, per O101-04.
United Kingdom: Report Fraud, the national reporting service run by the City of London Police, and your bank if a bank transfer was involved. The bank has its own obligations on authorized push payment fraud that this lesson does not cover.
Elsewhere: your national fraud or cybercrime reporting service, and the police. The evidence file is the same in every country; only the door differs.
Always: the exchange, if funds arrived at or left one, and the issuer, if the asset is a freezable stablecoin, per O101-02.
What to file
The report is only as useful as what it can be matched against. From the evidence file:
- Every transaction hash, and every address, yours and theirs.
- The timeline: when you were contacted, when you clicked or signed, when funds moved, what you did after.
- Screenshots of the message, the site, the app, the person, with the sender's handle or address.
- The platforms: which wallet, which site, which exchange, which chat app.
- The amounts, in the asset and in dollars at the time.
Facts only. Do not speculate about who did it; a wrong name in a report is worse than none.
A victim files with IC3 on the day of the loss, hashes and addresses attached, and keeps the reference number.
Four months later, the attacker's receiving address is one of many named in a seizure order against a laundering network. Because the victim's complaint carried that address, their loss is on the list of claims the returned funds are distributed against. Nothing about their individual case was ever investigated; the address matched.
The same victim, at tax time, takes the reference number and the evidence file to a preparer, who uses them to document a theft loss under the memorandum in the year of discovery.
Neither outcome was likely on the day the report was filed. Neither is possible without it.
The tax side, in one paragraph and a warning
For United States federal tax, the memorandum says a scam loss can be a deductible theft loss if you entered the transaction for profit, the conduct was theft under state law, and recovery is not reasonably expected. Investment scams qualify. So does being tricked into moving your own money to "protect" it. Romance scams and extortion do not, through 2025, because they are personal losses the 2017 act suspended. The deduction lands in the year you discovered the scam, which may not be the year the income was taxed, and the Taxpayer Advocate has said plainly that this mismatch is a problem the memo leaves open.
The warning. That is the whole of what this lesson will say, because per P6 the rest is not settled in the sources it can cite: how the deduction interacts with itemizing, with floors, and with an amended return for the income year. Take the evidence file and the report number to a qualified preparer. The cost is small against the amount at stake, and per F108-03 the process has rules you do not know.
This is United States federal tax only. The site's tax material is written against US rules unless a lesson says otherwise. A reader elsewhere has a different answer and needs their own authority for it.
It was stolen, so of course it is deductible.
For federal tax through 2025, theft is not the test. Motive is. The memorandum works through five victims of five thefts and finds that two of them, the romance and the kidnapping cases, cannot deduct a dollar, because the transaction they were tricked into had no profit motive and personal losses are suspended.
That is not a moral judgment about the victims. It is what the statute says, as read by Chief Counsel in 2025, and it may change if the suspension is extended, narrowed or allowed to lapse. Which is why this lesson carries a date, and why the preparer is not optional.
When it is filed
Put the reference numbers in the evidence file. Note the date. Then close it, and do not open it again for anyone who contacts you about the loss. O101-04 is about them.
Report the loss even though it will not be recovered: the report is the input to every chokepoint, the number everyone else will ask for, the count that gets a pattern worked, and the tell that separates help from the second wave. File with IC3 in the US, Report Fraud in the UK, your national service elsewhere, plus the exchange and any stablecoin issuer, with every hash, address, screenshot and time from the evidence file, and no guesses about who. For US federal tax, the 2025 IRS memorandum makes a scam loss deductible in the year of discovery when you entered the transaction for profit, so investment and account-protection scams can qualify and romance and extortion scams cannot through 2025; take the file and the report number to a qualified preparer and let them do the rest.