Can I deduct crypto stolen in a romance scam on my taxes?

Generally no. The IRS's March 2025 Chief Counsel memo concluded that crypto sent to a romance scammer fails the profit-motive test required under IRC §165(c)(2), so it is not deductible as a theft loss. Personal theft losses under §165(c)(3) are also suspended through 2025. A narrower capital-loss position may be available in some cases but should only be taken with a CPA's guidance.

What did the IRS 2025 memo say about crypto theft losses?

The March 2025 Chief Counsel Advice memo addressed several crypto-scam fact patterns and concluded that a theft-loss deduction under IRC §165(c)(2) is only available where the victim had a clear profit motive at the moment of transfer. Investment-scam losses may qualify; romance-scam losses generally do not, because the transfer is motivated by a personal relationship rather than profit.

What's the difference between a theft loss and a capital loss for stolen crypto?

A theft loss under IRC §165 is an above-the-line loss tied to the criminal act itself, with a profit-motive requirement and strict documentation rules. A capital loss treats the crypto as disposed of for $0 of proceeds and is reported on Form 8949 like any other crypto sale. The capital-loss path can offset capital gains and up to $3,000 of ordinary income per year, with the rest carried forward.

Does it matter if I sent the crypto from an IRA or retirement account?

Yes — and not in a good way. Liquidating an IRA or 401(k) to send funds to a scammer typically triggers ordinary income tax on the distribution plus a 10% early-withdrawal penalty if you are under 59½. The scam loss does not offset that income, so the tax bill from the distribution stands even when the funds are gone.

Do I need to file a police report to claim a crypto scam loss?

Yes. Any §165 theft-loss position requires documentation of the criminal act, which in practice means a police report plus a filing with the FBI's IC3 (ic3.gov) and the FTC. Even if you are pursuing a capital-loss position, contemporaneous reports strengthen the record.

Can I amend a prior return if I already claimed (or missed) a scam loss?

Usually yes, within the statute of limitations (generally three years from the original filing date). If you claimed a theft loss that the March 2025 memo now suggests was not deductible, talk to a CPA about whether to amend proactively. If you missed claiming a loss that does qualify, an amended return on Form 1040-X is the standard fix.

Crypto Stolen in a Romance Scam: Can You Deduct the Loss on Your Taxes? (2026 CPA Guide)

What is a crypto romance scam?

A crypto romance scam — sometimes called 'pig butchering' — involves a scammer who builds a fake romantic or close personal relationship with the victim over weeks or months, usually on a dating app, social platform, or messaging service. Once trust is established, the scammer engineers an urgent need: a medical emergency, a travel crisis, or an 'investment opportunity' with guaranteed returns.

The victim sends cryptocurrency to a wallet the scammer controls. By the time the relationship is exposed as fake, the crypto is gone — typically routed through mixers, bridges, and offshore exchanges within hours. The FBI's IC3 unit reported billions in losses from these scams in recent years, and most victims never recover the funds.

If this happened to you, the next question is almost always: can I at least claim the loss on my taxes? The 2026 answer is more restrictive than most people expect.

The short answer: is a crypto romance scam loss deductible?

In most cases, no — not as a theft loss. The IRS issued a Chief Counsel Advice memo in March 2025 that specifically addressed crypto scams routed through personal relationships, and concluded those losses are not deductible under current law.

There is one narrower path: treating the disposition of crypto sent to the scammer as a deemed sale for $0 and claiming a capital loss. This is not blessed by the IRS, sits in a gray area, and should not be filed without professional guidance.

Theft loss deduction (IRC §165(c)(2)): generally NOT available for romance-scam losses — fails the profit-motive test.
Personal theft loss (IRC §165(c)(3)): suspended by the TCJA for tax years 2018 through 2025, except in federally declared disasters.
Capital loss treatment (deemed disposition for $0): potentially available, but a defensible position only with strong documentation and a tax professional's review.
Recovery, restitution, or insurance reimbursement: reduces any deductible loss dollar for dollar.

IRC §165 and the IRS's March 2025 memo

Section 165 of the Internal Revenue Code governs deductions for losses, including theft. After the Tax Cuts and Jobs Act, personal casualty and theft losses under §165(c)(3) are suspended through tax year 2025 unless the loss is from a federally declared disaster. That leaves §165(c)(2) — losses 'incurred in any transaction entered into for profit' — as the only realistic path for an individual scam victim.

To qualify under §165(c)(2), the loss must result from a criminal act, the transaction must have been entered into with a profit motive, the loss must be unrecoverable by year-end, it must be claimed in the year of discovery, and it must be properly documented (including a police or IC3 report).

The IRS's March 2025 Chief Counsel memo walked through several common crypto-scam fact patterns and decided each one based on whether the victim had a profit motive at the moment they transferred the crypto. That distinction is what makes romance scams different from investment scams.

Why romance scams fail the profit-motive test

The memo's example involved a taxpayer who liquidated retirement and brokerage accounts and sent the proceeds in crypto to someone they believed they were in a relationship with. The scammer claimed the funds were needed for a medical emergency, then disappeared.

The IRS concluded the loss was not deductible because the funds were not transferred as part of an investment or profit-seeking activity. They were transferred to support a person the victim believed they had a personal relationship with — even though that belief was based on fraud. The motive at the moment of transfer was personal, not profit.

Compare that to a victim who sent crypto to what they were told was a high-yield trading platform, expecting returns. That fact pattern looks more like an investment scam and may qualify under §165(c)(2). The dividing line is not whether the scam happened — it is what the victim thought they were doing with the money when they sent it.

The capital-loss alternative: deemed disposition for $0

When the theft-loss path is closed, some practitioners take a different position: the crypto sent to the scammer's wallet is treated as disposed of for $0 of proceeds. That creates a capital loss equal to the victim's basis in the crypto, which can offset capital gains and up to $3,000 per year of ordinary income, with the remainder carried forward.

This works best when the crypto went directly to an external wallet (so there is a clear on-chain disposition), the victim has clean basis records, and the loss is reported as a short-term or long-term capital loss on Form 8949 with a clear description in the adjustment column.

Important caveat: the IRS has not issued guidance blessing this treatment for scam losses outside an investment context. A capital loss filed this way could be challenged on examination. We discuss the position openly with clients, document the reasoning in a workpaper, and make sure the filing position is one the client is comfortable defending if asked.

What to document if you were scammed

Whether you ultimately claim a theft loss, a capital loss, or no loss at all, the documentation requirements are the same — and gathering them while the trail is fresh is critical:

A report filed with law enforcement: local police, the FBI's IC3 (ic3.gov), and the FTC at reportfraud.ftc.gov.
Every wallet address the crypto was sent to, plus the on-chain transaction hashes and timestamps.
Exchange records showing the purchase, transfer, or withdrawal of the crypto (CSVs and account statements).
All communications with the scammer: chat logs, emails, screenshots, profile URLs, payment instructions.
Your basis records for the crypto: when you acquired it, what you paid, and any prior 1099s or tax forms.
Any evidence of recovery efforts, restitution claims, or reimbursement from an exchange or insurer.

How Side Growth Partners handles crypto scam loss reporting

We are a Boston CPA firm with deep crypto tax experience, working with clients across all 50 states. When someone comes to us after a romance scam, we start by understanding the fact pattern in detail — what the victim believed at the moment of transfer, what the scammer represented, what records exist on-chain and off — and we map that against §165, the March 2025 memo, and current practitioner positions.

From there we tell you, in plain English, what you can and cannot claim, the audit risk on each path, and what the filing will look like. If a position is available, we document it carefully and file it. If no position is available, we say so — and we help you make sure the underlying crypto basis records are clean so you do not pay tax on phantom gains in future years.

If you lost crypto in a romance scam, an investment scam, or a hybrid of both, book a 30-minute Consultation Call. We will quote the engagement after we see the shape of the records.