Can You Write Off Stolen Money? Business, Fraud, and Disasters

You can write off stolen money on your federal taxes only when the theft hit your business or a profit-seeking investment. Personal theft losses — cash from your wallet, a stolen car, a drained checking account from an identity thief — are not deductible. The Tax Cuts and Jobs Act suspended personal casualty and theft deductions starting in 2018 outside federally declared disaster areas, and the One Big Beautiful Bill Act made that restriction permanent for 2026 and beyond.¹ So the question comes down to what was stolen and why you had the money in the first place.

Business Theft Is Fully Deductible

If someone steals from your business — an employee embezzles, a vendor defrauds you, inventory walks out the door — you can deduct the full unreimbursed loss against your ordinary income. The deduction sits under Internal Revenue Code Section 165 and is not subject to the percentage-of-income limits that apply to personal losses.²

The timing rule surprises a lot of owners. You take the deduction in the tax year you discover the theft, not the year it happened.³ An employee who skimmed $200,000 over five years produces one deduction in the year the scheme comes to light. You do not amend five years of returns.

The deductible amount is the lesser of the property’s adjusted basis (what you paid, plus improvements) or the drop in fair market value caused by the theft, reduced by any insurance or reimbursement you received or reasonably expect to receive.³ For stolen cash, basis is just the face value taken.

Report the loss on Form 4684 (Casualties and Thefts). Sole proprietors carry it to Schedule C.³ If an insurance claim is still open and you have a reasonable prospect of recovery, you have to wait — no deduction is available until the claim resolves.¹

Legal Fees to Recover Stolen Property

Attorney fees spent trying to recover stolen business property can be deductible as collateral theft losses, but the IRS scrutinizes them. A 2025 Tax Court case denied the legal fee deduction where the taxpayer could not prove the underlying theft in the first place. Document the theft itself before assuming the legal bills come along for the ride.

Investment Fraud and Ponzi Schemes

Losses from investments entered into for profit are also deductible under Section 165, even without an active business.² This is the route for victims of Ponzi schemes, fraudulent funds, and similar scams. The test is whether you handed the money over expecting to make money.

The IRS created a safe harbor for Ponzi-type schemes under Revenue Procedure 2009-20. A qualifying investor deducts either 95% or 75% of net investment:⁴

95% if you are not pursuing third-party recovery, such as suits against banks or feeder funds.
75% if you are pursuing or plan to pursue third-party recovery.

From either figure, subtract actual recoveries and any insurance or SIPC reimbursement.⁴ The safe harbor is claimed on Section C of Form 4684, which asks for your initial investment, later contributions, income you reported on prior returns, withdrawals, and any recoveries actual or expected.⁵ Signing the return signs the declarations in Section C, Part II.

If you claim an investment theft loss outside the safe harbor, Form 4684 Section B, line 19 asks for the name, taxpayer ID (if known), and address (if known) of the person or entity that ran the scheme.⁵

Crypto Scams and “Pig Butchering”

Cryptocurrency theft and online investment scams follow the same profit-motive test. If you moved crypto into a platform or arrangement expecting returns and the operation was fraudulent, the loss falls under Section 165(c)(2) as a transaction entered into for profit. In Chief Counsel Advice 202511015, the IRS confirmed that victims of certain investment scams, including pig-butchering schemes, can claim theft losses when the transaction was profit-motivated.

Romance scams and kidnapping-for-ransom scams do not qualify. Money sent for personal reasons is a personal casualty loss, and personal casualty losses generally are not deductible.

Personal Theft Losses Are Not Deductible

Cash from your wallet, jewelry from your bedroom, a car from your driveway, funds drained from a personal account by an identity thief — none of that is deductible on your federal return. The 2017 suspension limited personal casualty and theft deductions to losses from federally declared disasters, and the One Big Beautiful Bill Act made the restriction permanent. Starting in 2026, state-declared disasters are also recognized, but the core rule shutting out non-disaster personal theft losses does not change.¹

That means the common cases — phishing, identity theft that drains a bank account, a stolen laptop or phone — get no federal tax relief. The loss is real; the tax code treats it as a nondeductible personal expense.

One narrow exception: if you have personal casualty gains for the year (say, an insurance payout that exceeds your basis in damaged property), you can offset those gains with personal casualty losses, including theft.³ This rarely helps a theft victim because it requires having casualty gains in the same year.

Theft in a Federally Declared Disaster Area

If the theft or looting happened inside a federally declared disaster area, it can still qualify. Check the appropriate box on Form 4684 and enter the FEMA declaration number.³ Two reductions then apply:

The first $100 of each separate theft or casualty event is not deductible.³
After the $100 reduction, your total personal casualty and theft losses for the year are deductible only to the extent they exceed 10% of your adjusted gross income.²

A taxpayer with $80,000 in AGI who suffers a $12,000 qualifying theft loss subtracts $100 (to $11,900), then subtracts $8,000 (10% of AGI), leaving a $3,900 deduction. Smaller losses often disappear entirely inside those floors.

How to Calculate the Deductible Loss

For any deductible theft loss — business, investment, or qualifying disaster-related personal loss — the calculation is the same. Start with the lesser of the property’s adjusted basis or the drop in fair market value caused by the theft. Then subtract insurance or other reimbursement received or expected.³

Adjusted basis is generally what you paid plus improvements. For stolen cash, basis equals the amount taken. For business equipment, reduce basis by depreciation already claimed. The fair market value cap matters when property has fallen in value: if you paid $5,000 for equipment worth $2,000 at the time of the theft, your loss is limited to $2,000 before reimbursement.

Business and investment theft losses are not subject to the $100 floor or the 10% AGI threshold. Your unreimbursed loss cuts taxable income dollar for dollar.

Insurance Reimbursement

You cannot claim the deduction while an insurance claim is pending with a reasonable prospect of recovery.¹ Wait for the claim to settle. If the insurer pays less than adjusted basis, the shortfall is your deductible loss. If the insurer pays more than adjusted basis — possible with appreciated property — you have a taxable gain, reportable on Form 4684, that can be deferred by reinvesting in similar property within the replacement period under Section 1033.⁶

Proving Basis Without Original Receipts

Theft victims often cannot produce original purchase receipts, especially when the stolen property included the records. The IRS accepts secondary evidence. You can request statements from contractors who did improvements, get historical property values from the county assessor, or gather written descriptions from people who saw the property.⁷ Bank and credit card statements showing the original purchase also work. Perfection is not required, but a bare assertion of value with no supporting documentation will not survive an audit.

If You Recover the Stolen Money Later

Recovering funds after you have already deducted the loss can trigger income. Under the tax benefit rule in Section 111, you include the recovered amount in gross income, but only to the extent the earlier deduction actually reduced your tax.³ If the deduction gave you no tax benefit — income was already zero, or the loss exceeded income — the recovery is not taxable.

Say you deducted a $10,000 theft loss, but AGI limitations meant only $4,000 actually reduced taxable income. Two years later you recover $6,000. Only $4,000 is taxable, matching the tax benefit you received; the remaining $2,000 is excluded. The taxable portion is ordinary income in the year of recovery, not a reason to amend the old return.

Court-awarded interest on a judgment or settlement is separate taxable interest income, reported like any other interest.⁸

Records and Filing

To claim a theft loss, the IRS wants you to show four things: that you owned the property, that it was stolen, when you discovered the theft, and whether a reimbursement claim exists with a reasonable expectation of recovery.³ A police report is the strongest single document, but not the only acceptable evidence. Bank statements showing unauthorized withdrawals, correspondence with a brokerage about a fraudulent fund, or screenshots documenting an online scam can supplement or substitute where a police report is not available.

Also keep records establishing basis and value: purchase receipts, appraisals, photographs, insurance coverage documents, and any correspondence with insurers.

All theft losses go on Form 4684.³ Business losses flow to the relevant business schedule. Investment theft losses go to Section B of Form 4684 and then to Schedule A if you itemize. Ponzi losses using the safe harbor go through Section C. If you discover a theft loss after filing, you generally have three years from the date you filed the original return, or two years from the date you paid the tax (whichever is later), to file an amended return claiming a refund.⁹

1
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
2
Office of the Law Revision Counsel. 26 USC 165 Losses
3
Internal Revenue Service. Publication 547 (2025), Casualties, Disasters, and Thefts
4
Internal Revenue Service. Rev. Proc. 2009-20
5
Internal Revenue Service. Instructions for Form 4684, Casualties and Thefts
6
Office of the Law Revision Counsel. 26 USC 1033 Involuntary Conversions
7
Internal Revenue Service. Taxpayers Can Follow These Steps After a Disaster to Reconstruct Records
8
Internal Revenue Service. Topic No. 403, Interest Received
9
Internal Revenue Service. Time You Can Claim a Credit or Refund