IRS Rules on Deducting $60,000 Lost in a Romance Phishing Scam: What You Need to Know
Washington, DC – August 30, 2025, Losing $60,000 to a romance phishing scam is a devastating blow, and many victims wonder if the IRS offers tax relief for such losses. Unfortunately, under current tax law, deducting money lost in a romance scam as a theft loss is generally not possible due to restrictions imposed by the Tax Cuts and Jobs Act (TCJA) of 2017, which remain in effect through 2025. Here’s a breakdown of the situation based on the latest IRS guidance and what options might be available.
Why Romance Scam Losses Are Not Deductible
According to a March 2025 IRS Chief Counsel Advice memorandum (CCA 202511015), theft losses from scams like romance phishing are classified as personal casualty losses under Internal Revenue Code (IRC) § 165(c)(3). These scams typically involve fraudsters building trust through online relationships before soliciting funds for fictitious emergencies, such as medical expenses. Since the victim’s intent is personal (e.g., helping a supposed romantic partner) rather than profit-driven, these losses do not qualify for a theft loss deduction under current law. The TCJA eliminated deductions for personal casualty and theft losses from 2018 through 2025, except in cases tied to federally declared disasters.
For example, the IRS memo explicitly states that in a romance scam scenario, where a taxpayer transfers funds from retirement or brokerage accounts to a scammer posing as a romantic partner, the loss is not deductible because it lacks a profit motive. This restriction applies even if the scam involves significant financial harm, as in the case of a $60,000 loss.
Potential for Capital Loss Deduction
There may be a limited alternative for victims who lost cryptocurrency in a romance scam. According to tax experts at Gordon Law Group, if the funds were in crypto assets held for investment, victims might treat the loss as a capital loss by claiming the crypto was “sold” for $0. This could offset capital gains and, up to a $3,000 annual limit, ordinary income. However, this approach is considered a legal gray area, as the IRS has not issued specific guidance on applying capital loss treatment to non-investment scam losses. Consulting a tax professional is critical to assess risks and ensure compliance, especially given potential IRS scrutiny during an audit.
Challenges with Taxable Income from Retirement Accounts
A significant issue for scam victims arises when funds are withdrawn from tax-deferred accounts like a 401(k) or IRA. For instance, if a victim withdrew $60,000 from a 401(k) to send to a scammer, that amount is treated as taxable income in the year of withdrawal, potentially increasing their tax liability. The IRS memo highlights this problem, noting that theft losses must be claimed in the year the scam is discovered, not the year the money was lost, which can create a mismatch if the income was reported in a prior year. This was illustrated in a case where a taxpayer faced a $5,000 tax bill after losing $39,000 in a romance scam, as reported by AARP.
Other Relief Options
While a theft loss deduction is unlikely, victims can explore:
- Offer in Compromise (OIC): The IRS may settle tax debt for less than the full amount in cases of financial hardship, though the process is complex and has a low success rate. Legal assistance is recommended due to stringent qualification requirements.
- Legal Action: Pursuing recovery through law enforcement or civil lawsuits is another avenue, though recovery prospects are often slim, as noted in the IRS memo. Maintaining records of all transactions and communications with the scammer is crucial for any claims.
- Reporting the Scam: Victims should report the scam to the FBI’s Internet Crime Complaint Center (IC3) and local authorities to document the loss, which may support future tax or legal claims.
Future Outlook
The TCJA’s restrictions on personal casualty losses are set to expire at the end of 2025. If Congress does not extend these limits, deductions for romance scam losses could become available again in 2026, as noted by the National Taxpayer Advocate. However, this would not retroactively apply to a $60,000 loss incurred in 2024 or 2025.
Practical Steps
For someone asking “for a friend” about a $60,000 romance scam loss, the best course of action is to:
- Consult a tax professional to explore capital loss options, especially if cryptocurrency was involved.
- File IRS Form 4684, Casualties and Thefts, if pursuing any deductible loss, ensuring proper documentation.
- Report the scam to authorities and retain all records, as advised by the IRS.
- Be cautious of tax-related scams promising relief, as the IRS warns against misleading social media advice.
While the IRS currently offers no direct tax relief for romance scam losses, the emotional and financial toll, as highlighted by cases like Kate Kleinert’s, underscores the need for broader legislative reforms to support victims. For now, professional guidance is essential to navigate this complex tax landscape.
Sources: Cherry Bekaert, Taxpayer Advocate, IRS.gov, Gordon Law Group, AARP, Current Federal Tax Developments
FAQ: Can You Deduct a $60,000 Loss from a Romance Phishing Scam on Your Taxes?
Q1: Can I deduct a $60,000 loss from a romance phishing scam on my federal taxes?
A: No, under current IRS rules, losses from romance phishing scams are considered personal casualty losses under Internal Revenue Code § 165(c)(3). The Tax Cuts and Jobs Act (TCJA) of 2017 eliminated deductions for personal casualty and theft losses from 2018 through 2025, except for losses tied to federally declared disasters. Therefore, a $60,000 scam loss is generally not deductible in 2025.
Q2: What if the scam involved cryptocurrency? Can I claim a capital loss?
A: Potentially, but it’s a gray area. If the $60,000 was lost in cryptocurrency held for investment purposes, you might claim a capital loss by treating the crypto as “sold” for $0. This could offset capital gains and up to $3,000 of ordinary income annually. However, the IRS has not explicitly approved this approach for non-investment scam losses, so consult a tax professional to assess risks and ensure compliance.
Q3: I withdrew the $60,000 from a retirement account to pay the scammer. Does that affect my taxes?
A: Yes, withdrawals from tax-deferred accounts like a 401(k) or IRA are considered taxable income in the year they are withdrawn, potentially increasing your tax liability. For example, a $60,000 withdrawal in 2025 would be added to your taxable income, and you may also face a 10% early withdrawal penalty if under 59½. The scam loss itself doesn’t offset this income, as it’s not deductible.
Q4: Can I claim the loss in the year I discover the scam?
A: Yes, under IRS rules, theft losses must be claimed in the tax year the scam is discovered, not when the money was lost. However, since personal theft losses are not deductible through 2025 unless tied to a federal disaster, this timing rule likely won’t help for a romance scam loss in 2025.
Q5: Are there any other tax relief options for scam victims?
A: You can explore an Offer in Compromise (OIC) with the IRS to settle tax debt caused by the taxable withdrawal, but approval is rare and requires proving financial hardship. You’d need to demonstrate inability to pay the full tax liability. Consulting a tax attorney is recommended due to the complexity of the process.
Q6: What happens after 2025? Could I deduct the loss then?
A: The TCJA’s restrictions on personal casualty and theft loss deductions are set to expire at the end of 2025. If Congress does not extend these limits, you may be able to deduct romance scam losses starting in 2026, provided you meet IRS requirements (e.g., filing Form 4684 and proving the loss). However, this would not apply retroactively to a 2025 loss unless specific legislation allows it.
Q7: Should I report the scam to authorities?
A: Yes, report the scam to the FBI’s Internet Crime Complaint Center (IC3) at www.ic3.gov and your local law enforcement. Keep detailed records of all transactions, communications, and police reports, as these may support future legal or tax claims, even if recovery is unlikely.
Q8: What documentation do I need to pursue any tax claims?
A: To explore any potential deductions or relief, gather:
- Bank or cryptocurrency transaction records showing the $60,000 transfer.
- Communications with the scammer (e.g., emails, texts).
- Police or IC3 reports documenting the scam.
- Tax records, including Forms 1099-R for retirement withdrawals.
File IRS Form 4684, Casualties and Thefts, if pursuing a capital loss or future deduction, and consult a tax professional for guidance.
Q9: Can I avoid taxes on the withdrawal if I was scammed?
A: No, the IRS treats retirement account withdrawals as taxable income regardless of how the funds were used or lost. The scam does not exempt the withdrawal from taxation, which is why victims often face unexpected tax bills, as noted in cases reported by AARP.
Q10: How can I protect myself from tax-related scams promising relief?
A: Be cautious of social media or online claims promising easy tax write-offs for scam losses. The IRS warns against fraudulent advice. Always verify information with a licensed tax professional or directly through IRS.gov to avoid falling victim to secondary scams.
Disclaimer: This FAQ is for informational purposes only and is not a substitute for professional tax advice. Consult a certified tax professional or attorney to address your specific situation, especially given the complexity of scam-related tax issues.