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The Law Office of Seth J. Howell, PLLC
Realizing you've been scammed hits hard. There's the financial loss, but there's also the emotional hit. That feeling of violation and the resulting loss of trust in your own judgment can be just as hard to deal with as the financial damage, but you're not alone. Millions of people each year fall prey to these scams, and those people come from all walks of life. As technology grows more advanced, so to do scammers. They're deliberate, they study how banks, brokers and the IRS operate, and they know how to find and target people with vulnerabilities.
The most important thing to do once you've realized a scam is to step back, take a deep breath, and trust yourself again before moving forwards. One common issue I've seen is that someone has been scammed out of their retirement, and left with nothing but a seemingly insurmountable tax bill that they don't have the money left to pay for, but you're never out of options.
There are situations where you can deduct the loss on your tax return.
But the main question the IRS will be asking is "why did you send the money in the first place?"
Under I.R.C. §165, theft losses are only deductible if the loss was tied to:
If the loss was part of your personal life, say you fell victim to a romance scam or a fake kidnapping, the tax code treats that as a personal theft loss, and those are generally not deductible until 2026. That’s due to how Congress wrote the 2017 tax law changes that came from the Tax Cuts and Jobs Act. Another important note to remember is that the loss can be deducted in the year that you realize the money is gone, not in the year that you sent it.
So the very first question we look at is:
“Was I sending this money as an investment or business activity?”
Not whether it was smart,
not whether it worked,
but what you believed you were doing.
Your intent matters.
If you believed you were investing — crypto, stocks, real estate, a trading platform, anything like that — then we’re usually looking at a §165(c)(2) loss (a transaction entered into for profit).
In those cases, a deduction may be allowed, but there are a couple more factors that will be relevant
But timing matters.
The IRS has a rule that the loss is generally deductible in the year you realize the money isn’t coming back, and when there’s no reasonable chance of recovery left.
Some common indicators that you may be at this point already:
When those pieces fall into place, that’s typically when the deduction is taken.
Losses tied to business activity fall under §165(c)(1).
Those are still deductible today.
This includes:
If this fits your situation, the deduction is more easy to take.
If the relationship was emotional, romantic, or built around personal trust rather than investment, the tax law classifies it as a personal theft loss.
Under the law as it currently stands (2018–2025), those personal losses aren’t deductible, unless tied to a federally declared disaster, which scams are not.
There are a number of situations that may feel like they straddle the line. Maybe it started as a romantic relationship until they started asking for investments, or you fell for a romance scam, then someone reached out to you claiming to be a "fraud protection analyst." Everyone has a different situation, and the IRS realizes this. If you find yourself wondering if your situation might be deductible, IRS Memo 202511015 provides 5 scenarios and walks through their reasoning on each.
Even if you're unsure, there are certain things you should still do.
The most important step is preserving facts while details are still clear.
You don’t need to organize them. Just gather:
Evidence is going to be your best friend once you or your tax professional are trying to make this argument to the IRS. The more you send them, the more likely they'll be to accept your argument and the quicker you can find resolution.