Fraud victims in the United States face a compounding financial hardship when they are required to pay taxes on stolen money. Since 2018, taxpayers have faced significant restrictions on their ability to claim theft losses as deductions on federal tax returns, a limitation that was made permanent last year under legislation signed by the president. The Internal Revenue Service clarified in a memorandum issued earlier this year that while losses from investment fraud may qualify for deductions, stolen funds from other categories of scams—including impersonation schemes and romance fraud—generally do not.
The financial consequences extend further for victims who accessed tax-deferred retirement savings as part of the fraud. Withdrawals from accounts such as traditional 401(k)s or individual retirement accounts trigger income tax obligations. Additionally, account holders under age 59½ face a 10% early withdrawal penalty on top of standard income taxes owed on the distributed amounts. These cumulative tax liabilities can substantially increase the total cost to victims beyond their original losses.
A bipartisan measure in Congress, designated as H.R. 9500 and titled the Tax Relief for Fraud Victims Act, seeks to address these tax consequences. The proposed legislation would restore the ability of fraud victims to claim theft loss deductions and eliminate the 10% early withdrawal penalty in applicable cases. The House Ways and Means Committee approved the bill on July 1 with unanimous support, though the timing and likelihood of consideration by the full House remain uncertain.
Fraud losses in the United States have reached historically high levels. The Federal Trade Commission reported that consumers disclosed $15.9 billion in fraud losses during 2025, marking a record and reflecting a 27% increase from the prior year. Since 2020, reported losses have surged nearly 430%. Imposter scams represented the most frequently reported fraud category, with approximately 20% of reporting victims sustaining financial losses totaling $3.5 billion collectively. Investment scams generated the largest aggregate losses at more than $7.9 billion. Notably, high-value fraud incidents involving losses exceeding $100,000 have increased significantly, particularly among adults age 60 and older, frequently involving liquidated retirement accounts.
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