Scam victims in the United States frequently encounter a compounding financial hardship when they discover they owe taxes on money stolen from them. Tax treatment of fraud losses has become increasingly restrictive since 2018, when temporary restrictions were implemented under the Tax Cuts and Jobs Act of 2017. A measure enacted last year made these restrictions permanent, creating challenges for those seeking to claim losses on their tax returns.
The current tax code treats different types of fraud differently. Investment fraud losses may qualify for deductions according to an Internal Revenue Service memorandum issued in March 2025, while losses from other scams — including impersonation and romance fraud — generally do not. When victims access tax-deferred retirement accounts as part of the fraud, additional tax consequences arise. Distributions may trigger income taxes, and individuals under age 59½ may face an additional 10% early withdrawal penalty.
To address these disparities, lawmakers introduced the Tax Relief for Fraud Victims Act, designated as H.R. 9500. The legislation would eliminate deductibility restrictions for theft losses and waive the 10% penalty in applicable cases. The House Ways and Means Committee approved the measure on July 1 with unanimous support, though the timing of full House consideration remains uncertain.
Reported fraud losses have reached unprecedented levels. In 2025, consumers reported $15.9 billion in losses to the Federal Trade Commission, marking the highest total on record and representing a 27% increase from the prior year. Imposter scams emerged as the most frequently reported fraud category, though investment scams produced the largest financial losses at over $7.9 billion. Adults age 60 and older have experienced disproportionate impact, with losses of six figures or more representing 68% of reported losses among that demographic in 2024.
The proposed legislation would restore deductibility for personal casualty and theft losses previously limited to those resulting from federally or state-declared disasters. It would also allow victims to claim losses in the tax year they occurred rather than when discovered, and provide additional flexibility for replacing retirement account withdrawals subject to contribution limits.
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