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Your crypto was stolen. Is the loss deductible?

Investment-fraud losses can be deductible as a theft loss under IRC §165(c)(2) — the one route the law left open after personal casualty and theft deductions were disallowed. Whether yours fits turns on five conditions, and most of them are about facts you already know. Walk them here: nothing is uploaded, nothing is stored, and we will never sell you "recovery".

What this is. A structured walk through the conditions IRS Publication 547 (2025) lists for losses from financial scams, so you know which documents to gather and whether this is worth a professional's time. It is information, not advice, and it produces no number. ClearBasis is tax software — not a law firm, accounting firm or tax preparer.

The five conditions

What the law actually says

IRC 165(a) allows a deduction for any loss sustained during the year and not compensated by insurance or otherwise. IRC 165(c) limits an individual to three categories: (1) losses incurred in a trade or business; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business; and (3) except as provided in subsection (h), losses of property NOT connected with a trade or business or a transaction entered into for profit arising from fire, storm, shipwreck, or other casualty, or from theft. IRC 165(e) provides that any loss arising from theft is treated as sustained in the taxable year in which the taxpayer discovers the loss.

The 2025 sunset was REMOVED, not extended. Public Law 119-21 (enacted July 4, 2025) amended 165(h)(5)(A) so it now reads, without an end date, that a personal casualty loss deductible in a taxable year beginning after December 31, 2017 is allowed only to the extent attributable to a Federally declared disaster or a State declared disaster. So: (a) the disallowance of non-disaster personal casualty and theft losses is now PERMANENT, not scheduled to lapse after 2025; (b) the only new relief is that beginning in 2026 a state-declared disaster also counts, which does nothing for scam victims; (c) for both tax year 2025 and tax year 2026, an individual scam victim's ONLY route to a deduction is IRC 165(c)(2) - a theft loss in a transaction entered into for profit. There is no scam-specific carve-out in P.L. 119-21.

The memo works through five scam fact patterns and splits them on one axis only: whether the taxpayer parted with the money in a transaction entered into for profit. Three qualified under IRC 165(c)(2) - a compromised-account scam (a fake bank 'fraud specialist' induced the taxpayer to move investment funds to accounts the scammer controlled), a 'pig butchering' cryptocurrency investment scam, and a phishing scam in which the scammer drained the taxpayer's investment accounts. Two did not - a romance scam (funds sent for a purported romantic partner's medical bills) and a fake-kidnapping/grandparent scam (funds sent under duress) - because those transfers had no profit motive, making them personal casualty losses under 165(c)(3) that section 165(h)(5) disallows. On amount, the memo limits the deduction to the taxpayer's adjusted basis in the property under section 1011 (generally what the taxpayer paid), not the inflated fair market value shown on the scammer's fake dashboard; where funds came out of an IRA the taxpayer still owes income tax on the distribution, and that taxed amount establishes basis. On timing, the losses were sustained in 2024 - the year the taxpayers discovered the theft AND determined there was no reasonable prospect of recovery.

Why we do not cite that memorandum as authority: A CCA is a 'written determination' under IRC section 6110(b)(1) and 6110(i), and IRC section 6110(k)(3) provides that a written determination may not be used or cited as precedent - so 202511015 shows how the IRS National Office reasons about these facts, but it does not bind the IRS in another taxpayer's case and it does not bind any court.

The part that is documentation, not opinion

Two conditions decide most cases, and both are evidence problems rather than questions of interpretation: proving that what happened meets the elements of theft under the law of the place where it happened, and showing that by the end of the year you claim it there was no reasonable prospect of getting the money back.

The taking must be illegal under the law of the jurisdiction where it occurred, with criminal intent. IRS Publication 547 (2025) phrases this as 'illegal under the law of the state where it occurred'; Rev. Rul. 2009-9 phrases it as 'illegal under the law of the jurisdiction in which it occurred.' In practice a practitioner identifies the applicable state larceny / theft-by-deception / false-pretenses / securities-fraud statute and maps the scam's facts to its elements. This is a genuine problem for crypto scams where the perpetrator, the servers, and the receiving wallets are offshore and unidentified - see open_questions. This is the element most likely to require an attorney.

The deduction is deferred, in whole or in part, so long as at year end the taxpayer has a bona fide claim for reimbursement with a substantial possibility of success - an insurance claim, a bank or card chargeback or wire recall, a pending clawback or receivership or restitution proceeding, or a live civil suit against an identified and solvent defendant. Retaining an asset-recovery firm or filing a claim can therefore push the deduction into a LATER year. Conversely, the absence of an identified, reachable, solvent defendant is usually the strongest fact supporting 'no reasonable prospect of recovery.' A partial recovery expectation means a partial deduction now and the balance later. Recoveries received after the deduction are generally picked up in the later year under the tax benefit rule.

Where it goes on the return. SECTION B - 'Casualties and Thefts of Business and Income-Producing Property.' Despite the word 'Business' in the heading, Section B is where an individual reports a theft loss of income-producing property held in a transaction entered into for profit. The Form 4684 instructions define income-producing property as property held for investment - stocks, notes, bonds, gold, silver, vacant lots, works of art. Section A is for personal-use property and is where the 165(h)(5) disallowance bites; a scam victim who lands in Section A generally gets nothing. Section C is used ONLY if the taxpayer qualifies for and elects the Rev. Proc. 2009-20 safe harbor - in that case complete Section C first, skip Section B lines 19 through 27, and carry the Section C result to Section B line 28. Section D is the election to deduct a federally declared disaster loss in the preceding year and is irrelevant here. Section B Part I computes the loss per property (lines 19-27), totaled on line 28. Part II sorts it by holding period and character. For property held one year or less the amount appears at line 32; for property held more than one year at line 38b. Both lines carry the same printed instruction: 'Individuals, enter the amount from income-producing property on Schedule A (Form 1040), line 16; or Schedule A (Form 1040-NR), line 7.' Schedule A line 16 is 'Other Itemized Deductions.' NOTE FOR PRODUCT COPY: this does NOT flow through Schedule 1. Schedule 1 line 4 picks up amounts routed through Form 4797, which is the trade-or-business path (Form 4684 lines 31, 38a, 39), not the individual investor path. Consequences: (1) the taxpayer must ITEMIZE - a scam victim who takes the standard deduction gets no benefit from this deduction, which is often the deciding practical fact; (2) it is an 'other itemized deduction', not a miscellaneous itemized deduction, so the 2%-of-AGI floor and the section 67(g) suspension do not apply (CCA 202511015 footnote; Rev. Rul. 2009-9); (3) the $100-per-event floor and the 10%-of-AGI reduction in section 165(h)(1) and (h)(2) apply to personal casualty losses in Section A, not to a 165(c)(2) loss in Section B; (4) it is an ordinary deduction, not a capital loss, so it is NOT capped at the $3,000 capital-loss limit.

One thing we will never tell you: to stop pursuing recovery so the deduction lands sooner. A live claim can defer the deduction, but chasing your money back is your call and often the better outcome — that trade-off belongs to you and a professional, not to a piece of software.

The documentation kit — opening shortly

A fixed-price evidence pack built for this exact claim: the on-chain trace of where your funds went, the transfer-by-transfer separation of profit-motivated payments from personal ones, a checklist against your state's theft elements, the reasonable-prospect-of-recovery file, and Form 4684 figures with every number traceable to its source. Prepared by you, using our software — you review and sign, as with any self-prepared return.

Leave your email for one message when it opens — nothing else, ever:

Meanwhile the free scan rebuilds what you still hold, so the stolen portion is separated from the portion you can still prove: run the free scan.

Where a professional is not optional

Honestly unsettled

Sources

scam-loss-2026.1 · reviewed Aug 2026 · ClearBasis is tax software, not a law firm, accounting firm or tax preparer, and this page is information rather than advice. We do not offer, endorse or refer "fund recovery" services; anyone promising to recover stolen crypto for an up-front fee should be treated as a second scam. More free tools: IRS letter decoder · The Exchange Graveyard · Who reports on you