Fraud victims in the United States face a compounding financial hardship when they discover they may owe taxes on money stolen through scams. Current tax law restricts the ability of victims to claim deductions for losses resulting from fraud, a limitation that took effect in 2018 and became permanent last year under recent legislation.
The restrictions on deductibility vary depending on the type of fraud involved. Investment-related fraud losses may qualify for deduction due to the profit motive involved, but losses from other scams — including impersonation schemes and romance fraud — generally do not qualify. Additionally, when victims use tax-deferred retirement accounts such as 401(k)s or IRAs to cover fraudulent transactions, they may face income taxes on the distributions. Those under age 59½ may also incur a 10% early withdrawal penalty. An IRS memorandum issued in March 2025 clarified these distinctions.
The Tax Relief for Fraud Victims Act, designated H.R. 9500, represents a bipartisan effort to change this tax treatment. The proposed legislation would eliminate deductibility restrictions on theft losses and waive the 10% early withdrawal penalty in applicable cases. The House Ways and Means Committee approved the bill on July 1 by a vote of 39-0, though it remains uncertain whether the full House will vote on the measure.
Reported fraud losses have reached unprecedented levels, with the Federal Trade Commission documenting $15.9 billion in consumer fraud losses in 2025, representing a 27% increase from the previous year. Since 2020, reported losses have climbed nearly 430%. High-value scams targeting older adults have driven much of this increase, with consumers age 60 and older experiencing disproportionate six-figure losses, often stemming from retirement account withdrawals.
Proponents of the legislation argue that the current tax consequences compound the harm experienced by fraud victims. The bill would also provide flexibility by allowing victims to deduct losses in the tax year they occurred rather than when the fraud was discovered, and would simplify the process of replacing withdrawn retirement funds.
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