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Victims of fraud sometimes suffer a second financial blow: they have to pay taxes on the stolen money.
Starting in 2018, fraud victims face limits on their ability to claim losses as deductions on their tax returns due to temporary changes under the 2017 Tax Cuts and Jobs Act. President Donald Trump’s “Big and Beautiful Bill” law, enacted last year, made the change permanent.
According to an IRS memo issued in March 2025, losses from investment fraud may be deductible, but losses from other frauds, such as identity fraud and romance scams, are not, experts say.
Additionally, if the victim uses a tax-deferred retirement account, such as a traditional 401(k) or individual retirement account, as part of the fraud, the distribution may be subject to income tax. Additionally, if the victim is under age 59 1/2, a 10% early withdrawal penalty may be imposed.
A bipartisan bill in Congress aims to change the tax treatment of these losses. HR 9500, known as the Fraud Victims Tax Relief Act, would, among other provisions, eliminate the deduction limit and waive the 10% penalty where applicable.
“Not being able to claim a theft loss deduction is very punitive,” said Matthew Roberts, a tax attorney and partner at Meadows Collier in Dallas.
The bill was approved by the House Ways and Means Committee on July 1 by a vote of 39-0. It is unclear when or if the full House will consider this measure.
Reported fraud has increased by nearly 430% since 2020
According to the Federal Trade Commission, losses due to fraud continue to rise. In 2025, consumers reported $15.9 billion in fraud losses to the FTC. This is the highest amount on record and an increase of about 27% from the $12.5 billion in 2024. Since 2020, reported losses have increased nearly 430%, according to the FTC.
Identity fraud ranked as the most commonly reported type of fraud last year, according to the latest data from the FTC. According to FTC data, 80% of the approximately 1 million people who filed fraud reports did not lose money, while the remaining 20% lost a total of $3.5 billion. Investment fraud resulted in the largest reported losses, amounting to more than $7.9 billion.
According to the FTC, the overall increase in fraud losses is driven by a sharp increase in the percentage of consumers who say they’ve been defrauded of $100,000 or more, and this trend is most common among adults 60 and older.
“Typically, it’s because retirement accounts are cashed out,” said Clark Flintvall, AARP’s political director for financial security.
According to the FTC’s 2025 Annual Report to Congress released in December, six-figure losses or higher accounted for $1.6 billion (68%) of the $2.4 billion in losses reported in 2024 in that age group.
how the law has changed
Prior to 2018, taxpayers generally could claim itemized deductions for unreimbursed personal injury and theft losses due to weather events, etc., subject to certain conditions, such as being able to deduct only the amount of the loss that exceeds 10% of the taxpayer’s income.
However, the TCJA changed the rules to limit the deductibility of such losses to those resulting from federally declared disasters. The provision was originally scheduled to apply only to tax years 2018 through 2025, but was made permanent last year under the Big and Beautiful Act and expanded to include state-declared disasters.
Separately, losses from investment fraud may also be deductible because the investor had a profit motive, but would be treated differently under the theft loss portion of the tax code, experts said.
“That’s another very frustrating part of this whole scenario,” Flintover said. “The victim has to be the victim of the right type of fraud.”
Bill restores deduction and adds other protections
The new bill would eliminate disaster-related limits on both personal injury and theft claims.
“Reinstating the deduction to provide relief to victims of fraud and allowing them to deduct the amount stolen could alleviate a large portion of their tax burden,” Flintover said.
The bill would also provide flexibility to victims by allowing taxpayers to deduct theft losses in the tax year in which the loss occurred, rather than in the year the fraud was discovered. Under current law, if it’s discovered that fraud occurred using funds that were taxed in the previous year, victims who qualify for the deduction typically have to apply the deduction to their income in the year the fraud was discovered, Roberts said.
“Many retired taxpayers may be left with no taxable income for several years after the theft, especially if they have lost their retirement benefits,” Roberts said.
In addition to waiving the 10% early withdrawal penalty where it would otherwise apply, the bill would also make it easier for victims to replace funds withdrawn from retirement accounts, which can be difficult now due to contribution limits and other rules, experts said.
