Theft Loss Tax Deduction: Eligibility, Calculation, and Form 4684

You generally cannot take a theft loss tax deduction on personal property anymore. Since 2018, personal theft losses are deductible only when the theft is attributable to a federally declared disaster, and starting in 2026 the law also allows the deduction for state-declared disasters. Theft losses tied to investments, business property, or Ponzi-type fraud follow different rules and remain deductible. Which category your loss falls into decides everything else.

What the IRS Treats as Theft

The IRS defines theft as the taking and removing of money or property with the intent to deprive the owner of it.¹ The definition is broad on purpose. Larceny, robbery, embezzlement, extortion, kidnapping for ransom, and fraud or misrepresentation can all qualify, provided the conduct was illegal under the law of the state where it occurred and was carried out with criminal intent.²

A bad business deal, a broken promise, or a civil dispute is not theft for tax purposes, even if you lost money. If you cannot point to conduct that was criminal under state law, there is no theft loss to deduct.

Personal Property: The Disaster-Only Rule

The Tax Cuts and Jobs Act of 2017 eliminated the general deduction for personal theft losses starting in 2018, limiting them to losses caused by federally declared disasters. The One Big Beautiful Bill Act (Public Law 119-21), signed in July 2025, made that limitation permanent and, starting in 2026, expanded qualifying events to include state-declared disasters.³

A federally declared disaster is one where the President authorizes federal assistance under the Stafford Act. A state-declared disaster is a natural catastrophe, fire, flood, or explosion that the state’s governor (or the mayor of DC) and the Treasury Secretary jointly determine is severe enough to warrant the deduction.⁴

Outside those declared events, personal theft losses are not deductible. A break-in at your home, a stolen car, a stolen package on the porch — none of it produces a deduction, regardless of value. This is the answer for the large majority of everyday thefts.

The Personal Casualty Gains Exception

One narrow workaround exists. If you have personal casualty gains during the same tax year, such as an insurance payout that exceeded your adjusted basis in destroyed or stolen property, you can deduct non-disaster personal theft losses up to the amount of those gains.⁵ This situation is uncommon but worth knowing about when multiple events land in one year.

Investment and Scam Losses: The Profit-Motive Path

Theft losses from property held in a transaction entered into for profit — investments, rental property, and similar income-producing assets — are not “personal casualty losses” under the tax code.⁴ The disaster-only rule, the $500 per-event floor, and the 10% adjusted gross income threshold do not apply.¹ This is the category most scam victims miss.

Whether a loss qualifies depends on why you held the property or entered the transaction. In 2025, the IRS Chief Counsel analyzed several common scam scenarios (CCA 202511015):

Compromised account scams, where a victim transferred funds believing they were protecting an existing investment account: profit motive existed, loss deductible.
“Pig butchering” investment scams, where a victim sent money believing it was going into a cryptocurrency or other investment: deductible.
Phishing of already-invested funds by a hacker: deductible as a loss from property held for profit.
Romance scams, where a victim sent money to someone posing as a romantic partner: no profit motive, not deductible.
Kidnapping scams, where a victim sent money to a fake kidnapper: not deductible.

The controlling question is whether you were trying to earn a return on the money or protect an existing investment. If yes, there is a path to a deduction even without a disaster declaration. These losses are reported on Section B of Form 4684, not Section A.

Ponzi Scheme Safe Harbor

Victims of Ponzi schemes and similar large-scale investment fraud have a streamlined option under Revenue Procedure 2009-20. The safe harbor removes the need to prove every element of theft under state law, which can be difficult when a fraud unravels across multiple jurisdictions over many years.⁶

To qualify, you must have directly invested cash or property in the fraudulent arrangement; investing through a feeder fund that then placed money with the fraudster does not count. You cannot have known about the fraud before it became public. And the lead figure must have been charged with or subject to a criminal complaint alleging fraud, embezzlement, or a similar crime.⁶

Under the safe harbor, your deductible loss equals your total investment multiplied by 95% (if you are not pursuing recovery from third parties) or 75% (if you are), minus any amounts already recovered or expected through insurance or SIPC.⁶ Report the loss on Section C of Form 4684, which replaces the appendix originally published with the revenue procedure.⁷ If you do not qualify or choose not to use the safe harbor, report the loss on Section B instead.

Business Property Theft

Theft of business property, including inventory, equipment, tools, and vehicles used in a trade or business, remains fully deductible and is not subject to the disaster-only limitation, the $500 per-event floor, or the 10% AGI threshold.¹

The calculation is simpler than for personal property. Your deductible loss is your adjusted basis in the stolen property, minus any salvage value and any insurance or other reimbursement you receive or expect to receive.¹ Unlike personal-use property, you do not compare basis to any decrease in fair market value; basis controls. Report the loss on Section B of Form 4684.⁵

Calculating a Deductible Personal Theft Loss

If your personal theft loss qualifies, because it is tied to a declared disaster or offset by personal casualty gains, several layers of calculation apply before you reach the deductible amount.

Loss Amount

Start with two numbers: your adjusted basis in the stolen property (what you paid, plus improvements), and the decrease in fair market value caused by the theft. Your loss is the smaller of the two. Then subtract any insurance or other reimbursement you received or expect to receive.⁵ When property is completely stolen, the decrease in fair market value equals the property’s full value before the theft, because the value afterward is zero.

The $500 and 10% AGI Reductions

After calculating your net loss, two mandatory reductions apply. Subtract $500 for each separate theft event during the year.⁴ Five items stolen in one break-in is one event and one $500 reduction; five separate thefts on different occasions each trigger their own reduction.

Then add up all your remaining casualty and theft losses for the year and subtract 10% of your adjusted gross income. Only what exceeds that threshold is deductible.¹ For someone earning $80,000, the first $8,000 in losses produces no tax benefit. After the $500 per-event reduction and the 10% floor, smaller thefts rarely generate a deduction even when they qualify.

Qualified Disaster Losses

Some declared disaster losses receive better treatment. Losses that qualify as “qualified disaster losses” under specific disaster designations in the tax code are exempt from the 10% AGI reduction.¹ Not every federally or state-declared disaster automatically qualifies; Congress designates specific disaster periods for this enhanced treatment.

Qualified disaster losses also come with a filing benefit. You can claim them without itemizing. You add your net qualified disaster loss to your standard deduction and report the combined figure on Schedule A, carrying the total to Form 1040, line 12e.¹

When to Claim the Loss

You claim a theft loss in the year you discover the theft, not the year the crime actually happened.⁸ If an embezzler took from you over three years but you only realized it this year, the whole loss belongs on this year’s return.

Insurance Claims Pending

If you have filed an insurance claim and there is a reasonable prospect of reimbursement, you cannot deduct that portion of the loss yet. You wait until the claim is denied, settled short, or otherwise resolved with reasonable certainty.¹ The portion you do not expect to recover can be deducted while the claim remains open.

If you deduct a theft loss and later recover something in a later year, you generally include the recovered amount in income for the year you receive it.¹ One exception: if the original deduction produced no tax benefit — for instance, it fell below the 10% AGI threshold — you do not have to report the recovery as income.

Electing to Claim in the Prior Year

Theft losses from a federally declared disaster can be deducted on the prior year’s return instead of the year the disaster occurred.⁹ You make the election by filing Form 1040-X for the prior year, or by claiming the loss on the original prior-year return if not yet filed. Doing so can produce a refund faster.

Filing the Deduction on Form 4684

All theft loss calculations flow through Form 4684. Personal-use property losses go on Section A, business and investment property losses go on Section B, and Ponzi-scheme safe harbor losses go on Section C.⁵ The form asks for the date you acquired the property, the date you discovered the theft, your adjusted basis, the fair market value before the theft, and any reimbursement received or expected.

For personal-use property, the result flows to Schedule A (line 16). For business and investment property, the loss flows to other forms depending on the type of property involved.¹⁰

Evidence to Keep

The IRS expects you to prove four things: that you owned the property, that it was stolen, when you discovered the theft, and whether any reimbursement claim exists with a reasonable prospect of recovery. A police report is the most straightforward documentation, but the IRS accepts “other satisfactory evidence” when records are unavailable.¹

To establish value, keep purchase receipts, photographs, and any appraisals from before the theft. Where receipts are gone, a competent appraiser’s estimate of fair market value is acceptable. Insurance correspondence, claim settlement letters, and records of partial recovery all support the amount you deduct.

Keep tax records for at least three years from the date you filed the return.¹¹ Theft losses involving worthless securities or bad debts can be claimed up to seven years after the return’s due date, so records tied to those situations should survive at least that long. Given that a later-year recovery can pull income back into the picture, keeping records longer than the minimum is the safer approach.

1
Internal Revenue Service. Publication 547 – Casualties, Disasters, and Thefts
2
Internal Revenue Service. IRS Memorandum 20055201F – Theft Loss Advisory
3
Internal Revenue Service. Casualty Loss Deduction Expanded and Made Permanent
4
Office of the Law Revision Counsel. 26 USC 165 – Losses
5
Internal Revenue Service. Topic No. 515, Casualty, Disaster, and Theft Losses
6
Internal Revenue Service. Revenue Procedure 2009-20
7
Internal Revenue Service. Instructions for Form 4684
8
eCFR. 26 CFR 1.165-8 – Theft Losses
9
Federal Register. Election To Take Disaster Loss Deduction for Preceding Year
10
Internal Revenue Service. Instructions for Form 4684
11
Internal Revenue Service. Topic No. 305, Recordkeeping