Victims of fraud often face an additional financial hit: they have to pay taxes on money that was stolen from them.
Since 2018, there’s been a restriction on how fraud victims can claim losses on their tax returns, thanks to changes made under the 2017 Tax Cuts and Jobs Act. This legislation, informally termed President Donald Trump’s “Big and Beautiful Bill,” made those restrictions permanent.
While losses from investment fraud can be deducted, a recent IRS memo from March 2025 clarified that this does not extend to losses from other types of scams like identity theft or romance scams. Moreover, if a victim’s retirement account, such as a 401(k) or IRA, is involved, any distributions might be taxable. And for those under the age of 59 and a half, there’s also a 10% early withdrawal penalty that may apply.
A bipartisan proposal in Congress, known as the Fraud Victim Tax Reduction Act (HR9500), aims to address these issues. If passed, it would remove the current deduction restrictions and eliminate the 10% penalty where applicable.
Matthew Roberts, a tax attorney, expressed that “not being able to claim a theft loss deduction is very punitive.” The bill received unanimous approval from the House Ways and Means Committee on July 1, but it remains uncertain when, or if, the full House will take it up.
Reported fraud has surged nearly 430% since 2020
The Federal Trade Commission reports an alarming rise in fraud-related losses. In 2025, consumers disclosed fraud losses totaling $15.9 billion, marking a nearly 27% jump from $12.5 billion in 2024. Over the last few years, losses have seen a staggering increase of around 430%, according to the FTC.
Identity fraud has been the most commonly reported type of scam, as per the latest FTC statistics. Interestingly, about 80% of the roughly 1 million people who filed fraud reports did not actually lose any money, while the remaining 20% lost a combined total of $3.5 billion. Investment fraud accounted for the lion’s share, with reported losses exceeding $7.9 billion.
The FTC attributes the overall rise in fraud losses to a noticeable increase in individuals reporting they’ve been defrauded of $100,000 or more, particularly among those aged 60 and above. “Typically, it’s because retirement accounts are cashed out,” noted Clark Flintvall, AARP’s political director for financial security.
According to the FTC’s 2025 report, six-figure losses for older adults totaled $1.6 billion, which comprises 68% of the total $2.4 billion reported in 2024.
Changes in the law
Before 2018, taxpayers generally had the ability to itemize deductions for personal injury and theft losses, under certain conditions. These deductions had to exceed 10% of the taxpayer’s income, however.
The TCJA tweaked the regulations, limiting eligibility for deductions to only losses from federally declared disasters. Initially, this was supposed to be a temporary measure lasting from 2018 to 2025 but was made permanent last year under the Big and Beautiful Act and even broadened to include state-declared disasters.
On the other hand, while losses from investment fraud can be deducted due to a profit motive, they are treated differently under theft loss provisions, according to experts. “That’s another very frustrating aspect of this entire situation,” Flintvall remarked. “The victim has to fall victim to the right type of fraud.”
The bill restores deductions and adds protections
The proposed bill would lift restrictions on personal injury and theft claims related to disasters.
“Reinstating the deduction to help fraud victims and allowing them to deduct the amount lost could really help ease a significant part of their tax burden,” Flintvall mentioned.
The bill also seeks to allow victims to deduct theft losses in the year they occurred, rather than the year they were discovered. Under current regulations, if fraud is identified involving taxed funds, victims typically have to report the deduction in the year of the fraud’s discovery. “Many retired taxpayers may find themselves with no taxable income for several years following their theft, especially if they lost retirement funds,” Roberts added.
In addition to waiving the 10% early withdrawal penalty, the new legislation would simplify the process for victims looking to replace funds withdrawn from retirement accounts, a task currently complicated by various contribution limits and rules.
