Scam victims in the United States face a compounding financial burden when they owe taxes on money stolen through fraud. Under current tax law, most victims cannot claim theft losses as deductions on their returns, creating a second financial hit alongside the original theft.
The tax treatment of fraud losses has become increasingly restrictive. Prior to 2018, taxpayers could generally claim itemized deductions for theft losses subject to certain conditions. The Tax Cuts and Jobs Act of 2017 limited deductibility to losses from federally declared disasters, and this temporary provision was made permanent last year. Investment fraud losses remain deductible due to profit motive rules, but money lost to impersonation, romance, and other common scams typically does not qualify. Victims who withdrew from tax-deferred retirement accounts face additional complications, including potential income taxes on distributions and a 10% early withdrawal penalty for those under age 59½.
To address these issues, Congress is considering the Tax Relief for Fraud Victims Act, H.R. 9500, which was approved by the House Ways and Means Committee on July 1 with unanimous support. The legislation would eliminate disaster-related deduction limitations, waive the 10% early withdrawal penalty where applicable, and allow victims to claim losses in the year the theft occurred rather than when discovered. The bill also aims to streamline the process of replacing stolen retirement account funds.
The need for such relief has grown urgent as fraud losses reach record levels. The Federal Trade Commission reported that consumers lost $15.9 billion to scams in 2025, representing a 27% increase from the previous year and a 430% rise since 2020. Imposter scams ranked as the most frequently reported fraud type, while investment scams caused the largest financial losses at over $7.9 billion. Adults age 60 and older have been particularly affected, with six-figure losses comprising 68% of total losses reported by that demographic. The timing of when the full House will consider the measure remains uncertain.
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