For some scam victims, the financial damage does not end with the money lost — tax consequences can create an additional burden on funds they never recovered.
That is the reality facing a growing number of fraud victims who discover, after reporting the crime, that the tax code denies them relief. A permanent change to federal law now bars most scam victims from deducting even a single dollar of their losses.
Consumers reported a record $15.9 billion in fraud losses in 2025, a 27% jump from $12.5 billion the year before, according to Federal Trade Commission associate director Lois Greisman’s March 2026 testimony.
Since 2020, reported losses have surged by nearly 430%, and the FTC has also flagged a sharp rise in the number of consumers reporting six-figure losses, according to Greisman’s March 25 testimony.
How a 2017 tax-law change stripped protections from scam victims
Before 2018, taxpayers who suffered theft losses could claim an itemized deduction for unreimbursed amounts, subject to a 10% adjusted gross income floor, Congress.gov stated.
The Tax Cuts and Jobs Act of 2017 eliminated that option by restricting personal casualty and theft loss deductions to federally declared disasters.
That restriction was originally set to expire after the 2025 tax year, thereby restoring the deduction for personal theft losses starting in 2026.
Related: Vanguard drops chilling scam warning for every investor
The One Big Beautiful Bill Act instead made the limitation permanent, expanding the exemption only to include state-declared disasters, not theft or fraud.
Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas, told CNBC the current treatment is “very punitive.”
When a victim sends $50,000 to a scammer posing as a federal agent, the loss is not deductible, and if the funds came from a tax-deferred retirement account, the full withdrawal is still taxed as ordinary income.
The tax code treats different types of scam losses differently
The law draws a sharp line based on the victim’s motivation when they handed over the money, and that distinction frustrates tax professionals.
Victims of investment-related fraud, such as fake cryptocurrency platforms or Ponzi-style schemes, may still qualify for a theft loss deduction under current law, the IRS showed.
The IRS affirmed that interpretation in Chief Counsel Advice 202511015, a memorandum issued in March 2025, because those transactions involved a profit motive.
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People who lose money to impersonator scams, romance fraud, or fake kidnapping schemes are shut out because their losses are classified as nondeductible personal casualties.
“That’s another really frustrating part of this whole scenario,” said Clark Flynt-Barr, AARP’s government affairs director for financial security. “Victims have to be victims of the right type of scam,” CNBC reported.
Retirement-account withdrawals compound the damage for older victims
The fallout worsens when scammers persuade a victim to tap a tax-deferred retirement account, such as a traditional 401(k) or individual retirement account.
The full withdrawal is taxed as ordinary income regardless of where the money ended up, and the victim receives no offset for the loss.
If the account holder is younger than 59 and a half, the IRS imposes an additional 10% early withdrawal penalty on top of the income tax, CNBC confirmed.
Older adults bear a disproportionate share of this risk because they hold the largest retirement balances and face the most aggressive targeting.
Adults 60 and older reported more than $7.7 billion in losses in 2025, a 59% jump from the prior year, according to the Federal Bureau of Investigation’s Internet Crime Complaint Center 2025 Elder Fraud Report.
“Many taxpayers who are retired may not have taxable income in future years after the theft occurs, particularly where they lost their retirement funds,” Roberts noted in the CNBC report.
Bipartisan bill clears House committee with unanimous support
The Tax Relief for Fraud Victims Act, H.R. 9500, was introduced by Representatives Max Miller, a Republican from Ohio, and Tom Suozzi, a Democrat from New York.
Ways and Means Committee Chairman Jason Smith (R-MO) said at the committee’s July 1, 2026, markup that the bill let victims deduct scam-related losses and, in some cases, file amended returns years after discovery.
“Today, Americans face countless scams, and many victims may not find out they have become the target of one until years later,” Smith said. “Unfortunately, current tax rules require victims to pay tax on their scam-related losses. This bill helps make taxpayers whole again by allowing them to deduct the losses incurred from scams.”
The House Ways and Means Committee approved the measure on July 1 with a unanimous vote of 39 to 0, but it remains uncertain when the full House will take it up.
“It reinstates the deduction to provide relief to victims of fraud so they can deduct the amount stolen from them, thereby mitigating the majority of the tax consequences,” Flynt-Barr confirmed.
Steps scam victims can take before the next filing season
Tax professionals and the IRS recommend that victims take specific steps now, regardless of whether the pending legislation becomes law.
Fraud victims can strengthen their position by documenting every dollar lost and keeping all communications with the scammer, Roberts said.
Filing a report with the FBI’s Internet Crime Complaint Center and with local police creates the official record the IRS demands, the agency’s scam-victim guidance confirms.
Anyone who lost money to fraud in 2025 or earlier and has not yet filed or amended the relevant return can benefit from seeking professional tax advice, Roberts recommended.
The evidence a victim assembles today could determine whether a deduction is available if H.R. 9500 or a similar measure becomes law.
Related: First Thing a Scammer Asks For? Silence. Not Money.
