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Fraud victims are dealt multiple financial blows if they take money out of their retirement account before 59½ years of age. What’s worse, many financial losses resulting from scams aren’t deductible on your tax return.
A new bill introduced by the House Ways and Means Committee would change that by allowing for more instances where scam victims can claim personal losses from theft on their taxes.
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Under current U.S. law, you can only potentially deduct personal losses incurred from a weather event or a scam if it’s tied to an investment opportunity. That’s because investment scams are deemed to be motivated by profit, so it works similarly to claiming losses from the sale of underperforming stocks.
However, no such exemptions exist for victims of romance or imposter scams. If a victim of a romance scam drains their 401(k) and sends it to the cybercriminal under false pretenses, it’s not considered a for-profit move.
Not only would this individual need to pay income taxes on the distribution and replace those retirement funds over time, they would also be subjected to the IRS’ 10% early withdrawal penalty.
Inside the Tax Relief for Fraud Victims Act
Prior to 2018, taxpayers could claim itemized deductions for personal casualty losses — such as weather events, car accidents and vandalism — and theft losses like some scams. But President Donald Trump’s Tax Cuts and Jobs Act limited such losses to those resulting from a federally declared disaster. The Big Beautiful Bill, passed in 2025, made those changes permanent, while also adding state-declared disasters as an exemption, according to CNBC.
The proposed measure in the House, the “Tax Relief for Fraud Victims Act,” would eliminate those limitations for both personal casualty and theft losses. Scam victims would be able to deduct their loss to the extent it exceeds 10% of their adjusted gross income — and for more than just those tied to investment scams.
“It reinstates the deduction to provide relief to victims of fraud so they can deduct the amount stolen from them, thereby mitigating the majority of the tax consequences,” Clark Flynt-Barr, AARP’s government affairs director for financial security, told CNBC.
The Tax Relief for Fraud and Victims Act would also give victims the flexibility to claim losses in the year that they were incurred or were discovered. Victims would have one year to file amended tax returns from the date of discovery.
And, If applicable, the 10% IRS early withdrawal tax penalty would also be waived regardless of the purpose for which victims withdrew the money.
Scamming activity is up and business is good
In 2025, consumers reported $16 billion in fraud losses, according to the Federal Trade Commission. That is the highest fraud-loss total ever on record and up about 25% from 2024, the agency said in June.
Investment scams were far and away the most costly for consumers, totalling $7.9 billion in losses. On the other hand, imposter scams were the most prominent. About one-third of all fraud reports received by the FTC were tied to it. These scams involve cybercriminals posing as authority figures like the IRS or financial institutions to con victims.
“Some of the costliest impersonation scams start with a fake security alert, often from a bank,” the FTC said in a release. “People are convinced to move money to ‘protect’ it, with their losses often limited only by their available funds.”
Swindlers can contact their victims via phone, text or email, but social media has proven to be incredibly popular. Social media scams accounted for $2.1 billion of all consumer losses in 2025, and are popular places for investment, shopping and romance scams to originate.
What to do if you’ve been scammed
If you’ve been scammed, begin with reporting the incident to the FTC. Cyber-related crimes should also be reported to the FBI’s Internet Crime Complaint Center. You’re unlikely to hear back from these agencies, but your reports will be used to inform the public of fraud trends and help authorities catch criminals.
Depending on the level of the scam, you will need to contact your financial institution to make it aware of the incident. Be sure to also close any impacted accounts and change your login passwords.
Finally, if your personal identifiable information, such as your name and Social Security Number, were stolen, it might be a good idea to freeze your credit with the three major credit bureaus: Equifax, Experian and TransUnion. This prevents bad actors from opening new credit accounts in your name.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
