Cases
of
online
scams
have
been
rising
in
recent
years.
While
existing
laws
and
IRS
guidance
suggest
that
victims
can
take
a
theft
loss
deduction
on
their
income
tax
returns,
it
can
get
murky
when
investments
and
cryptocurrencies
are
involved.
In
the
case
of
the
latter,
the
IRS
generally
stuck
with
their
position
on
Notice
2014-12
which
states
that
any
cryptocurrency
related
losses
can
only
be
eligible
for
a
capital
loss.
Since
capital
losses
can
only
offset
up
to
$3,000
of
ordinary
income,
it
is
of
limited
use
to
taxpayers,
especially
if
they
withdrew
money
from
their
tax-deferred
retirement
accounts.
Fortunately,
a
few
months
ago,
the
IRS
issued
Chief
Counsel
Memorandum
202511015
which
stated
that
certain
online
scam
victims
can
claim
a
theft
loss
as
an
itemized
deduction.
The
memo
gave
examples
of
three
scammed
taxpayers
who
are
eligible
to
claim
a
theft
loss
connected
to
the
production
of
income.
The
first
taxpayer
was
the
victim
of
a
compromised
account
scam
where
an
impersonator
contacted
the
taxpayer
and
told
him
that
his
investment
account
has
been
compromised
and
attempts
were
made
to
withdraw
funds
from
the
account.
The
impersonator
told
the
taxpayer
to
set
up
a
new
account
controlled
by
the
impersonator
and
transfer
the
money
there.
The
taxpayer
authorized
distribution
from
IRA
accounts
and
to
transfer
the
distributed
funds
to
the
new
account
created
by
the
scammer.
After
the
taxpayer
makes
the
transfer,
the
impersonator
transfers
the
money
to
an
overseas
account.
The
second
taxpayer
was
a
victim
of
a
phishing
scam.
This
taxpayer
received
an
email
that
stated
that
his
retirement
accounts
have
been
compromised.
The
email
contained
a
link
which
would
supposedly
restore
his
account
and
provided
a
phone
number
to
a
so-called
fraud
specialist.
The
taxpayer
contacted
the
fraud
specialist
who
then
instructed
the
taxpayer
to
click
on
the
link.
By
doing
so,
the
scammer
was
able
to
obtain
the
taxpayer’s
login
information
to
his
retirement
accounts
and
used
it
to
transfer
the
funds
to
an
overseas
account.
While
the
facts
are
similar
to
the
first
taxpayer,
the
second
taxpayer
did
not
authorize
the
scammer
to
transfer
the
taxpayer’s
funds
to
the
overseas
account.
The
third
taxpayer
is
a
victim
of
the
pig-butchering
scam.
The
taxpayer
was
contacted
by
someone
online.
After
some
conversation,
the
scammer
told
the
taxpayer
about
a
secret
investment
opportunity
that
has
better-than-market-rate
returns
using
a
proprietary
investment
platform.
The
taxpayer
relying
on
the
scammer’s
rate
of
return
installed
the
investment
platform
to
his
phone
and
then
transferred
money
into
this
platform.
Soon
after
transferring
the
money,
his
account
balance
grew
immensely
and
the
taxpayer
added
even
more
money.
At
some
point,
the
taxpayer
attempted
to
withdraw
the
money
but
was
unable
to
do
so
unless
he
paid
additional
fees
or
taxes
to
the
platform.
The
taxpayer
became
suspicious
and
through
an
online
search
learned
that
the
investment
platform
was
fake.
The
IRS
stated
that
the
three
taxpayers
mentioned
above
can
take
a
theft
loss
deduction
for
the
amount
of
money
they
lost.
Also,
since
their
theft
was
connected
to
a
transaction
entered
into
for
profit,
it
is
not
considered
a
personal
theft
and
thus
not
subject
to
the
limitations
imposed
due
to
the
Tax
Cuts
and
Jobs
Act.
While
this
is
good
news,
those
who
are
being
audited
will
not
win
on
this
issue
simply
by
sending
a
copy
of
this
memo
to
the
auditor.
This
is
because
the
memorandum
does
not
address
two
issues
that
might
be
scrutinized
by
tax
auditors.
The
first
issue
is
whether
there
is
a
reasonable
chance
of
recovery
of
the
stolen
funds.
If
there
is
a
chance
of
recovery,
the
theft
loss
cannot
be
claimed
until
something
happens
to
show
that
there
is
no
longer
a
chance
of
recovery.
In
most
cases,
scam
victims
have
a
low
chance
of
getting
their
money
back,
usually
because
the
scammers
are
located
overseas.
Even
filing
a
police
report
will
not
help,
especially
if
the
local
agency
does
not
have
the
adequate
expertise
or
resources.
But
if
a
victim
files
a
civil
lawsuit
against
the
scammer
and
other
parties,
such
as
a
bank
or
cryptocurrency
exchange
platform,
it
is
arguable
that
there
is
reasonable
chance
of
recovery.
Most
scam
victims
having
learned
their
lesson
don’t
want
to
pay
for
a
lawsuit
unless
they
are
guaranteed
to
recover.
And
most
attorneys
will
not
take
a
case
on
contingency
unless
they
are
reasonably
certain
to
recover.
As
these
lawsuits
tend
to
take
months
or
years
to
settle,
if
the
taxpayer
has
income
from
cashing
out
investments
or
retirement
accounts,
they
may
not
be
able
to
claim
the
theft
loss
on
the
same
year
to
offset
that
income.
The
IRS
will
look
at
the
facts
and
circumstances
of
each
case
to
see
whether
there
is
a
reasonable
chance
to
recover
the
stolen
funds.
However,
certain
events
could
show
possible
recovery,
such
as
obtaining
a
prejudgment
attachment
against
the
defendant’s
assets
before
a
lawsuit
is
concluded.
The
second
issue
is
whether
the
scammer
violated
the
theft
laws
in
the
state
where
the
victim
lived.
In
most
states,
scammers
have
committed
theft
by
false
pretenses.
The
elements
usually
are
1)
a
false
statement
made
by
the
scammer;
2)
transfer
of
money
or
property
in
reliance
of
the
scammer’s
false
statements;
and
3)
the
scammer
had
the
specific
intent
to
steal
from
the
victim.
Proving
specific
intent
will
be
the
most
difficult
because
in
most
cases,
the
scammer
will
not
admit
to
stealing
from
the
victim.
Instead,
circumstantial
evidence
will
be
needed
to
prove
intent.
This
includes
chat
records,
and
in
the
case
of
pig
butchering
scam
victims,
screenshots
of
the
scammer’s
so-called
investment
platform
showing
fake
gains.
Considering
the
tax
auditor’s
perspective
might
help.
He
or
she
might
analyze
whether
the
facts
show
a
theft
or
simply
a
bad
investment.
A
taxpayer
who
lost
a
large
chunk
of
their
investment
will
be
inclined
to
argue
there
was
a
theft
in
order
to
get
better
tax
benefits.
One
final
note
about
the
IRS
memo
is
that
it
does
not
address
those
who
lost
money
due
to
cryptocurrency
failures
(such
as
the
Luna
Stablecoin)
and
exchanges
that
have
gone
bankrupt
such
as
FTX,
Celsius,
Three
Arrows
Capital,
and
Mt.
Gox,
to
name
a
few.
Some
of
the
masterminds
of
these
organizations
have
arguably
committed
theft
by
using
customer
deposit
funds
for
lavish
personal
expenses
or
to
pay
early
investors.
This
recent
IRS
guidance
should
make
taxpayers
feel
more
comfortable
about
taking
the
theft
loss
deduction
so
long
as
the
requirements
are
met.
However,
claiming
a
large
loss
can
increase
their
chance
of
an
audit
and
taxpayers
will
need
to
show
more
than
a
copy
of
this
memo
to
prove
their
case.
On
June
26,
2025,
in
coordination
with
Operation
Shamrock,
I
will
be
giving
a
presentation
explaining
how
to
claim
the
theft
loss
and
how
to
mitigate
the
tax
consequences
of
withdrawing
from
investment
and
tax-deferred
accounts
due
to
scams.
Operation
Shamrock’s
goal
is
to
educate
the
public,
mobilize
collective
action,
and
disrupt
the
operations
networks
of
transnational
organized
criminals
to
prevent
further
harm.
Please
email
me
for
more
details.
Steven
Chung
is
a
tax
attorney
in
Los
Angeles,
California.
He
helps
people
with
basic
tax
planning
and
resolve
tax
disputes.
He
is
also
sympathetic
to
people
with
large
student
loans.
He
can
be
reached
via
email
at
[email protected].
Or
you
can
connect
with
him
on
Twitter
(@stevenchung)
and
connect
with
him
on LinkedIn.