Tax Relief for Scam Victims: How to Claim the Theft Loss Deduction (2026)

Date: January 25, 2026

The rise of online scams—from 'Pig Butchering' Crypto Fraud to sophisticated Bank Wire and Romance Scams—has left thousands of Americans with massive financial losses. But as Tax Season 2026 approaches, many victims are discovering a second nightmare: Tax Liability.

You may owe taxes on "phantom profits" the scammer claimed you made, even though you never withdrew a cent. Or you may be missing out on a massive Scam Theft Tax Loss Deduction that could refund up to 40% of your lost principal.

While this guide focuses on crypto, the Theft Loss Deduction (IRC §165) applies equally to victims of all scams - Bank Wire Fraud and Romance Scams, where fiat currency was stolen. The filing process and evidence requirements are identical.

Navigating the complex IRS rules to find true tax relief for scam victims is difficult, but DDG is here to guide you through the process. This guide clarifies the chaotic landscape of crypto tax relief and explains how DDG helps you prove your loss to the IRS.

1. The Two Paths: Capital Loss vs. Scam Theft Tax Loss Deduction

Most victims confuse "Capital Losses" with "Theft Losses." They are completely different.

A. Capital Loss (The "Easy" Way - But Limited)

• What it is: You claim the lost crypto as a "sold" asset with $0 value.

• The Limit: You can only deduct $3,000 per year from your ordinary income. If you lost $100,000, it would take you 33 years to write it off.

• Who this is for: Victims with small losses or massive capital gains from other investments to offset.

B. Theft Loss Deduction (The "Holy Grail" - Section 165)

• What it is: Under IRC §165(c)(2), you can deduct losses from a "transaction entered into for profit" that turned out to be theft.

• The Benefit: You can potentially deduct the entire amount of your loss from your income in a single year.

• The Catch: The burden of proof is extremely high. You must prove it was a crime, not just a bad investment.

2. The "Ponzi" Trap (Safe Harbor Warning)

Many CPAs mistakenly try to file crypto scams under the Ponzi Safe Harbor (Rev. Proc. 2009-20).

• Warning: Most "Pig Butchering" scams do NOT legally qualify as Ponzi schemes under IRS rules because the fraudster often isn't a US-registered entity.

• The Risk: If you file for the Ponzi Safe Harbor and get audited, the IRS may reject your entire claim because the scam didn't fit the strict definition.

• The Solution: DDG recommends building a case for Theft Loss under §165, which requires proving "criminal intent" rather than "Ponzi structure."

The US Dollars and Bitcoin represent tax relief for scam victims claiming the IRS theft loss deduction.

3. The Audit Danger: Why a Police Report Isn't Enough

The IRS is aggressively auditing theft loss claims. Whether you lost Bitcoin, wired cash to a 'Romance' scammer, or sent a bank transfer to a fake investment platform, the burden of proof is the same. They know many people simply lost money on bad trades and are trying to claim it as "fraud." To survive an audit, you need more than an IC3 report. You need a Fraud Dossier.

What the IRS demands (that your CPA can't give you):

• Proof of Criminal Intent: Evidence that the counterparty never intended to invest your funds (fake dashboards, scripted lies).

• Tracing Evidence: Blockchain analysis showing the funds went to a known laundering wallet, not a trading desk.

• Expert Affidavit: A signed report from a Certified Fraud Examiner (CFE) attesting that this was a crime.

Crucial Note: Your CPA prepares your forms. They do not prepare your evidence. If you get audited, your CPA is not obligated to defend the fraud claim. You are on your own.

4. The DDG Solution: Comprehensive Tax Relief for Scam Victims

Filing a Theft Loss deduction is not a simple accounting task; it is a forensic legal argument.

DDG provides the evidentiary backbone, and the V2V Tax Team handles the filing.

Why You Need Both:

Local CPAs often treat crypto fraud like a "capital loss" or misapply the Ponzi rules because they have never seen a Pig Butchering case. Our team has amended hundreds of returns for victims whose original accountants filed incorrectly, exposing them to massive penalties.

The DDG/V2V Advantage

• The Evidence Backbone: DDG Intelligence generates the forensic fraud report proving the "theft" occurred. This is the shield that protects your deduction.

  
  

• Strategic Filing: Our tax professionals know the critical nuances of IRC §165. Timing is Everything: Did you discover the loss in 2024? Is there still a pending lawsuit? Filing in the wrong year can cause an automatic rejection. We determine the precise "Year of No Reasonable Prospect of Recovery" to lock in your deduction.

  
  

• Audit Defense Readiness: Getting a refund check is not the finish line. The IRS can audit a Theft Loss claim for up to 7 years. If they knock on your door in 2030, will your TurboTax receipt save you? No. You need the forensic dossier we build today.

  
  

Don't Risk an Audit with a Generalist.

We have fixed hundreds of botched returns. Get it right the first time with the team that specializes in Crypto Theft Loss.

Start Your Tax Recovery With DDG

Final Recommendations for Tax Season 2026

1. Stop Using TurboTax: DIY software cannot handle complex Theft Loss deductions. You will likely trigger an automatic rejection.

2. Don't Rely on a Generalist CPA: Unless your accountant understands blockchain tracing and Section 165 tax law, they are guessing.

3. Do Not Wait: Evidence collection takes time. Do not wait until April 14th to start gathering evidence.

4. Let DDG Handle It: From tracing the crypto to filing the 1040, we handle the entire process under one roof.