Victims of phone and online scams may suffer a double whammy. They lose their money and, because the Tax Cuts and Jobs Act of 2017 discontinued the deduction for personal theft losses, they cannot deduct their loss. Consumers lost $5.7 billion to investment scams alone last year. But a recently issued IRS memorandum has made it clear that losses from fraudulent transactions entered into with a profit motive are deductible.
Examples of scam losses that may qualify for a deduction…
- You’re enticed to open an account on a cryptocurrency platform, and you buy Bitcoin. The platform and your account turn out to be fake.
- A thief gets hold of the password for your brokerage account and steals from it.
- An imposter calls from your bank to warn that your high-yield savings account is in danger from hackers. He/she directs you to transfer the money to a more secure temporary account, which he then drains.
Examples of scam losses that don’t qualify…
- You have an online romance and send your paramour $50,000. The paramour turns out to be fake and disappears with your money.
- An imposter calls saying he is your grandson and has been arrested. He needs $20,000 for bail. You wire the money to the impersonator.
Caveats to the new ruling…
- Your theft loss deduction must be taken in the tax year you discover the loss, and you must have no reasonable prospects of recovery.
- You can deduct only the cost basis of your loss.
