Investment Scam Losses Stay Deductible as Tax Court Allows $925,000 Claim
Money lost to an investment scam is still deductible on a U.S. tax return, and on August 12, 2026, the U.S. Tax Court allowed a $925,000 theft loss in a case where the record never established who took the money. Since 2018, a personal scam loss with no investment behind it has been deductible only when it stems from a declared disaster, according to the IRS. What determines your outcome is what the money was for when you sent it. The IRS worked through five scam scenarios in 2025 and allowed the deduction in three of them. Deutsch v. Commissioner, T.C. Memo. 2026-66 then showed that a claim can survive even when the thief is never named. Here is where the line falls and what to keep.
Which Scam Losses the IRS Says Are Deductible
The Test Is What the Money Was For
If you sent the money expecting a return, the loss is generally treated as an investment loss. If you sent it to help someone, or because you were pressured, it is generally not deductible.
Money or property you transfer with the goal of earning a return. Common examples:
- Buying into an investment: shares, a fund, a note, or a private deal.
- Funding a trading account: money moved to trade with, including crypto.
- Sending funds to a platform you believe is real: a brokerage or exchange that turns out not to exist.
A theft loss from one of these transfers sits outside the rule that bars personal losses.
The IRS Allowed Three of Five Scam Scenarios
In a Chief Counsel Advice memorandum released in March 2025, the IRS applied that test to five situations.
| Scam situation | Deductible now | Why |
|---|---|---|
| Someone convinces you to move funds to a “safe” investment account | Generally yes | The transfer was made to reinvest |
| A trading platform that turns out not to exist, including crypto | Generally yes | The funds went out for investment purposes |
| Phishing that drains an account you held for investment | Generally yes | The underlying account was invested for profit |
| A person online who needs money for a personal emergency | Generally no | The IRS generally treats the transfer as personal |
| A payment made under duress, such as a purported ransom | Generally no | No profit motive behind the payment |
What the Line Looks Like on a $60,000 Loss
The line lands in ordinary situations like this one. Two people each lose $60,000, with no prospect of recovery. The first believed she was funding a cryptocurrency trading account, so her $60,000 generally falls on the deductible side. The second was helping someone she believed was a relative who was in trouble, so under the current law, her deductible amount is generally $0.
Investment Losses Skip the Two Reductions
One more detail favors the investment side. The $100 per-loss and 10-percent-of-adjusted-gross-income reductions that shrink a personal casualty claim generally apply only to personal-use property, so a loss on property held for investment is not reduced by either one.
Where the Tax Court Ruling Fits
1. The Split Turned on What Each Transfer Was For
Aladar Deutsch, a jewelry business owner in Texas, advanced $1,220,600 to a friend who said he needed a short-term loan to open a UBS account in Geneva so a “Dubai Group” could transfer $70 million for a Mexican ranch development. The court divided that money in two.
- Allowed, $925,000: Four lump-sum transfers between June 2008 and December 2009, made for the promised deal.
- Denied, $295,600: Fifty-three transfers covering the friend’s living expenses, because the record suggested he had been defrauded himself.
2. A Theft Loss Can Stand Without a Named Thief
The court held that a theft loss can be sustained even when the thief’s identity is unresolved, stating that “the evidence does not definitively resolve whether Mr. Visel ultimately appropriated Mr. Deutsch’s money and acted with the intent to do so, or Mr. Davidson appropriated Mr. Deutsch’s money.”
3. CPA Reliance Defeated the Penalty
The court also declined to sustain a $21,583 accuracy-related penalty. Deutsch had given his CPA the documents and the full history of the transfers, so the couple “reasonably relied on the advice of their CPA (who prepared the joint return) and acted with reasonable cause and in good faith.”
4. The Same Claim Would Fail Today
The deduction itself came under the 2010 law, when a personal theft loss was still allowed. That route closed for tax years beginning after 2017, and the 2025 tax law (P.L. 119-21) made the limit permanent, with eligible losses expanded to state-declared disasters beginning in 2026. Declared disasters do not include scams, so that route stays closed.
Money Sent Overseas Follows the Same Test
The analysis is the same wherever the money went, and the paperwork is what expands. Cross-border schemes are common, and a fake platform is often registered somewhere you have never been. The profit-motive question stays the same, and a few other filings come into view.
Reporting That Stays in Place
- Accounts held outside the U.S.: A fraud loss does not change your reporting duties. The FBAR and Form 8938 thresholds are measured separately from any deduction, and the differences between the two decide which applies to you.
- Digital assets and overseas property: The same test applies, alongside the ordinary tax treatment of cryptocurrency, the rules for selling assets outside the U.S., and foreign capital gains.
- Years you have not filed yet: The loss year and your filing history get settled together, and the streamlined filing procedures exist for that situation, with help catching up if the back years are the harder part.
Steps to Take Now
- Fix the date you learned the money was gone: A theft loss belongs to the year you discovered it, whatever year the transfers happened in.
- Document the profit motive in writing: Keep the account statements, platform records, and messages showing what the money was for.
- Confirm recovery is genuinely closed: A live claim or recovery effort pushes the deduction into a later year.
- Correct an earlier year if the loss belongs there: An amended return is the route once a year has been filed.
Most of the work in a claim like this is documentation, and the profit-motive question is usually settled by what the records show the money was for. Where a claim lands is usually decided before the return is filed, alongside the ordinary questions of filing from abroad.
The Year the Loss Belongs To
A theft loss is deducted in the year you discover it, and it is not sustained, while a claim for reimbursement carries a reasonable prospect of recovery. Both tests were run through Deutsch. He testified that he realized in 2010 that he had been defrauded, and the court accepted that year. His friend then missed the November 8, 2010, deadline to transfer the promised properties, and counsel advised that further action would be impractical and prohibitively expensive, leaving no reasonable prospect of recovery by late 2010. The IRS sets out both tests in Topic no. 515.
This article describes IRS guidance and a Tax Court memorandum opinion, which was decided under the law in effect for the 2010 tax year. All figures for current law reflect rules in effect as of publication. The information here is general and does not constitute tax, legal, or financial advice. Tax rules are complex and change frequently. Consult a qualified tax professional regarding your specific situation before taking any action.
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