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For victims of fraud, there is sometimes a second financial blow – they owe taxes on the stolen money.
Scam victims have faced restrictions on whether they can claim their losses as a deduction on their tax returns since 2018, due to temporary changes under the Tax Cuts and Jobs Act of 2017. President Donald Trump’s “big positive bill” legislation passed last year made that change permanent.
While losses from investment fraud may be deductible, according to an IRS memorandum issued in March 2025, money lost from other scams — such as impersonation or romance scams — is not, experts say.
Additionally, if the victim taps a tax-deferred retirement account such as a traditional 401(k) or individual retirement account as part of the fraud, income taxes may be owed on the distribution. And if the victim is under the age of 59½, an early withdrawal penalty of 10% may be imposed.
A bipartisan congressional bill aims to reform the tax treatment of those losses. Called the Tax Relief for Victims of Fraud Act, HR 9500 would remove the deduction limits and waive the 10% penalty if applicable, among other provisions.
“It’s a huge penalty not being able to claim a deduction on a loss,” says Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas.
The bill was approved by the House Ways and Means Committee on July 1 by a vote of 39-0. It is uncertain when the full House will consider the measure.
Reported fraud has increased nearly 430% since 2020
The amount of money lost due to scams continues to grow, according to the Federal Trade Commission. In 2025, consumers reported a loss of $15.9 billion to the FTC – the highest in history and an increase of about 27% from $12.5 billion in 2024. As of 2020, reported losses have increased by nearly 430%, according to the FTC.
Last year, impostor scams ranked as the most reported form of fraud, according to the latest FTC data. While 80% of the nearly 1 million who filed a scam report did not lose money, another 20% lost a total of $3.5 billion, FTC data shows. Investment scams led to the largest reported losses, more than $7.9 billion.
The overall increase in fraud losses is driven by a jump in the share of consumers who say they’ve been defrauded of $100,000 or more — the most common trend among adults age 60 and older, according to the FTC.
“Usually that’s because retirement accounts are being withdrawn,” said Clark Flynt-Barr, AARP’s director of government affairs for financial security.
In that age group, the loss of six figures or more amounted to $1.6 billion — 68% — of the $2.4 billion reported to be lost in 2024, according to the FTC’s 2025 annual report to Congress, released in December.
How did the law change?
Before 2018, taxpayers could generally claim a deduction for unpaid personal losses – such as a weather event – and criminal losses, subject to certain factors such as only being able to deduct the amount of the loss above 10% of the taxpayer’s income.
However, the TCJA changed the rules by limiting the deduction of such losses to those resulting from a state-declared disaster. The provision, originally scheduled to apply only to tax years 2018 to 2025, was made permanent last year under the “big positive bill,” which also expanded eligibility to include federally declared disasters.
Separately, amounts lost in investment scams can be deducted because there was a profit motive on the part of the investor, which is treated differently under the theft loss section of the tax code, experts said.
“That’s another really frustrating part of this whole situation,” Flynt-Barr said. “Victims must be victims of the right type of scam.”
The bill would restore the deduction, adding some protections
The new bill would eliminate the catastrophe-related limit for both personal injury and theft losses.
“It restores deductions to provide victims of fraud with the ability to withdraw money stolen from them, thereby reducing many of the tax consequences,” Flynt-Barr said.
The bill would also give victims more flexibility by allowing taxpayers to deduct their theft losses in the tax year in which the loss was incurred as opposed to the year in which the fraud was discovered. Under current law, if fraud is found to have occurred on income that was taxed in the previous year, victims who are eligible for the deduction generally must apply it to their income in the year the fraud was discovered, Roberts said.
“Many retired taxpayers may not have any taxable income for years to come after the theft, especially when they have lost their retirement savings,” Roberts said.
In addition to waiving the 10% early withdrawal penalty in cases where you would have otherwise worked, the bill would allow victims to easily withdraw funds from retirement accounts, which can be difficult now because of contribution limits and other laws, experts say.
