It’s tax season and beware of IRS scams. Separately, we’ve had some inquiries about how to handle losses after wiring money to a scammer, especially when the IRS won’t grant you personal deductions in the case of romance scams. We are sharing for awareness.
If you’ve been scammed or a loved one is being scammed, you’re not just dealing with financial loss—you could also be facing unnecessary taxes on money you no longer have.
Here’s the part most people don’t know: you may be able to reduce your tax liability—sometimes significantly—if your situation is structured the right way.
It’s critical that any communication between you and the scammer shows you were in a for-profit situation. If you are sending money to a scammer, make it appear that it’s a loan, and you’ll be paid back with interest.
If your loved one is still engaging in a romance scam and won’t listen to your pleas to disengage, at the very least, have them tell the scammer that the money they’ve sent them should be repaid as a loan.
The #1 rule: show a profit motive
Under current IRS rules, most personal scam losses are not deductible unless they are for-profit such as crypto investments and ponzi schemes. However, there’s a critical exception: if your loss was tied to a transaction entered into for profit, you may qualify for tax relief.
Everything comes down to this: were you trying to make money? If the answer is yes, your loss may be treated differently—and more favorably. If you can demonstrate a reasonable expectation of profit, you may be eligible to deduct the loss.
Examples that may qualify
- Investment scams (stocks, crypto, startups)
- Ponzi schemes
- Fake business opportunities
- Loans with promised repayment + interest (romance scams)
The theft loss deduction (the key tax break)
When structured correctly, scam losses may qualify as a theft loss deduction tied to a for-profit transaction.
Important: If the IRS views your loss as purely personal (not for profit), this deduction typically won’t apply. When it does apply, it can allow you to:
- Offset the loss against your income
- Reduce your overall tax bill
- Potentially carry losses forward
A little-known strategy: the "loan with interest" angle
One overlooked way to strengthen your case: if you gave money expecting it to be repaid with interest, you may be able to position it as a profit-driven transaction. For example, if you are sending money to a romantic interest over the internet, be sure to structure it as a loan. Even informal agreements can matter—if you can document intent. This includes situations like:
- “I’ll pay you back with interest”
- “This is a short-term investment”
- “You’ll get a guaranteed return”
Documentation is everything
- Emails, texts, or messages showing promised returns
- Payment records (bank, crypto, wire)
- Screenshots of the offer
- Timeline of events
The common mistake that costs victims thousands
Most scam victims don’t correctly classify their losses, document profit intent, or explore tax treatment. The result is they lose money twice—once to the scam, and again in taxes. For example, if a 401(k) was lost to a scam, you’ll now have to pay taxes on that distribution.
If you’ve been scammed or are thinking about sending money to someone you are unsure about:
- Preserve all evidence immediately.
- Map the transaction as a profit-driven event in the chat apps or whatever communication mechanism is being used (if applicable).
- Talk to a CPA familiar with fraud cases, but understand these professionals are expensive.
Where Backgrounder can help
Backgrounder helps you quickly analyze suspicious transactions, scams, and financial situations using AI + human investigators. We can help guide you through this if the scam is happening in real time.
- Verify what actually happened
- Understand your exposure
- Get clarity before making financial decisions
Try it now: upload your situation and get answers in minutes.