What does the 2025 IRS memo say about scam losses?

The loss can be deducted in three:

• Compromised account. Someone posing as the bank's fraud specialist had the person move retirement and investment accounts into "new" accounts. The person's aim was to keep the money safe and invested.
• Pig butchering investment. The person sent money to a fake crypto platform to invest.
• Phishing. Someone got the logins and emptied retirement and investment accounts without the person's permission. The IRS looked at why the money was there in the first place: it was invested.

It can't be deducted in two:

• Romance. The person sent money for a made-up medical emergency.
• Kidnapping. The person paid a ransom for a relative who had never been taken.

In those two the money was not sent to make a profit. A romance that turns into a fake investment is treated like the investment example from that point.

The IRS now sums the memo up in three conditions, in its instructions for Form 4684:

• 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.

The year. The loss belongs to the year the person found out and learned there was no reasonable prospect of recovery. In the examples that was the same year, because the bank and law enforcement said there was little to no prospect of getting the money back.

The amount. What the person actually put in. Gains that only ever showed on a screen, and were never taxed, are not part of it.

Retirement money. In the examples, money the person took out of an IRA to send is still taxed as income, including in the romance and kidnapping examples, where no loss can be deducted against it.

• It is not a law or a regulation. It is advice from the IRS Office of Chief Counsel to IRS staff, written around examples rather than one person's case.
• It doesn't cover every scam.
• It doesn't open the IRS safe harbor for Ponzi-type schemes. In the examples nobody was identified or charged, which the safe harbor needs.
• It is about the federal return.

The memo speaks of tax years 2018 through 2025, because the limit on personal theft losses was written to end after 2025. The IRS instructions for the 2025 Form 4684 describe that limit as applying to tax years after 2017, with no end date, and point people who lost money to a financial scam to the memo.

The memo says a theft loss from a transaction entered into for profit is reported on Form 4684, in Section B. From there it goes to Schedule A as an itemized deduction.

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.