How do I claim a scam loss on Form 4684?

The IRS instructions for the form list three conditions for a scam loss:

• The loss came from conduct that is theft under your state's law.
• You have no reasonable prospect of recovering the money.
• The loss came from a transaction entered into for profit, such as money you sent to invest.

Whether each one is met depends on your own facts. Money sent as a gift or to help someone usually does not meet the third one today.

• Section A is for personal-use property. Since 2018 those losses can be deducted only after a federally declared disaster, so a scam loss entered there gives no deduction.
• Section B is for business and income-producing property. The IRS memo on scam losses says a theft loss from a transaction entered into for profit is reported here.
• Section C is for Ponzi-type schemes under an IRS safe harbor. Among other conditions, the person who ran the scheme must have been charged with the crime or named in a criminal complaint. In the memo's examples nobody was identified or charged, so the safe harbor did not apply.

• Line 19: what was taken. For a fraudulent investment, the instructions ask for the name of the person or company that ran it, with their taxpayer ID and address if you know them.
• Line 20: your cost or basis. For money you sent, that is generally the amount you paid in. A balance the platform showed you is not part of it.
• Line 21: insurance or other reimbursement, whether or not you filed a claim for it.
• Lines 22 to 28: the arithmetic that leaves your loss.

Use a separate Part I for each theft.

Part II of Section B carries the loss to Schedule A (Form 1040), line 16. That makes it an itemized deduction: it lowers your tax only as far as your itemized deductions, with the loss, are more than your standard deduction.

If the loss makes your deductions bigger than your income for the year, you may have a net operating loss, which can generally lower your tax in a later year.

The return for the year you found out, once there is no reasonable prospect of recovery. If you aren't sure whether part of the loss will be repaid, the IRS says not to deduct that part until the year you become reasonably certain it won't be.

If that year's return is already filed, the form goes with an amended return, Form 1040-X. You generally have 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later.

Publication 547 says that for a theft loss you should be able to show:

• That the money or property was yours.
• That it was stolen.
• When you found out.
• Whether there is a claim for reimbursement with a reasonable expectation of recovery.

You must also be able to support the amount.

If you recover an amount you already deducted, you include it in your income for the year you get it back, as far as the deduction lowered your tax. You don't refigure the earlier year.

Your own tax preparer can claim the loss. Many haven't done one before, so we build the file they need: every payment, the timeline, and the numbers. Our tax pro, an Enrolled Agent, checks it. Your preparer files the return, and your refund goes to your own account. One fixed price, set in writing before any work.