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• Theft Loss Deduction
• Irs Loss From Theft Charges
• Irs Loss From Theft Insurance
• Irs Loss From Theft Rules

Generally, you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return if the loss is caused by a federally declared disaster declared by the President. For tax years 2018 through 2025, personal casualty and theft losses of an individual are deductible only to the extent they’re attributable to a federally declared disaster. Personal casualty and theft losses not attributable to a federally declared disaster are subject to the $100 per casualty and 10% rules, discussed later. Theft does not include the simple disappearance of money or property because you lost or mislaid it. But, the accidental loss of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. What are not considered theft losses (and therefore are not tax deductible)? You can no longer claim theft losses on a tax return unless the loss is attributable to a federally declared disaster. This deduction has been suspended until at least 2026 under the new Tax Cuts and Jobs Act (TCJA) that went into effect under President Trump’s administration on January 1, 2018.

(a)Allowance of deduction.

(1) Except as otherwise provided in paragraphs (b) and (c) of this section, any loss arising from theft is allowable as a deduction under section 165(a) for the taxable year in which the loss is sustained. See section 165(c)(3).

(2) A loss arising from theft shall be treated under section 165(a) as sustained during the taxable year in which the taxpayer discovers the loss. See section 165(e). Thus, a theft loss is not deductible under section 165(a) for the taxable year in which the theft actually occurs unless that is also the year in which the taxpayer discovers the loss. However, if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, see paragraph (d) of § 1.165-1.

(3) The same theft loss shall not be taken into account both in computing a tax under chapter 1, relating to the income tax, or chapter 2, relating to additional income taxes, of the Internal Revenue Code of 1939 and in computing the income tax under the Internal Revenue Code of 1954. See section 7852(c), relating to items not to be twice deducted from income.

(b)Loss sustained by an estate. A theft loss of property not connected with a trade or business and not incurred in any transaction entered into for profit which is discovered during the settlement of an estate, even though the theft actually occurred during a taxable year of the decedent, shall be allowed as a deduction under sections 165(a) and 641(b) in computing the taxable income of the estate if the loss has not been allowed under section 2054 in computing the taxable estate of the decedent and if the statement has been filed in accordance with § 1.642(g)-1. See section 165(c)(3). For purposes of determining the year of deduction, see paragraph (a)(2) of this section.

(c)Amount deductible. The amount deductible under this section in respect of a theft loss shall be determined consistently with the manner prescribed in § 1.165-7 for determining the amount of casualty loss allowable as a deduction under section 165(a). In applying the provisions of paragraph (b) of § 1.165-7 for this purpose, the fair market value of the property immediately after the theft shall be considered to be zero. In the case of a loss sustained after December 31, 1963, in a taxable year ending after such date, in respect of property not used in a trade or business or for income producing purposes, the amount deductible shall be limited to that portion of the loss which is in excess of $100. For rules applicable in applying the $100 limitation, see paragraph (b)(4) of § 1.165-7. For other rules relating to the treatment of deductible theft losses, see § 1.1231-1, relating to the involuntary conversion of property.

(d)Definition. For purposes of this section the term “theft” shall be deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery.

(e)Application to inventories. This section does not apply to a theft loss reflected in the inventories of the taxpayer. For provisions relating to inventories, see section 471 and the regulations thereunder.

Theft Loss Deduction

(f)Example. The application of this section may be illustrated by the following example:

Irs Loss From Theft Charges

A Ponzi scheme is a financial scam in which a promoter offers investors unusually high or consistent returns on an investment. The gullible investors give the schemer their money and, at first, they receive the promised high returns. This in turn attracts new investors who give the schemer even more money. However, the schemer never actually makes any investments or earns any profits. Instead, he or she pays the returns to the investors from their own money or money paid by later investors. Sooner or later (often much later) Ponzi schemes break down when not enough money comes in from new investors to pay off all the promised returns to earlier investors.

Ponzi schemes were named for Charles Ponzi, an Italian immigrant who carried out a notorious investment scam involving postal reply coupons in the 1920s. However, such schemes have been around for centuries. By far the most famous Ponzi scheme was the one perpetrated by securities trader Bernard Madoff, which was discovered in 2008 and ended up costing hundreds of investors an estimated $65 billion in losses. However, much smaller Ponzi schemes go on all the time. Like Madoff’s scheme, which went on for over 20 years, they often last for some time before being discovered.

Irs Loss From Theft Insurance

In reaction to the terrible losses suffered by Madoff’s victims, the IRS has enacted some special tax rules that make it much easier for Ponzi scheme victims to deduct their losses from their income taxes. Such deductions don’t make up for all the losses suffered through Ponzi schemes, but they do help.

Under the IRS rules, an investor in a Ponzi scheme is entitled to deduct his or her losses as a theft loss, instead of a capital loss from an investment. This is good for the investors because the deduction for capital losses from investments is normally limited to a maximum of $3,000 per year. There is no such limit for theft losses. In addition, investment theft losses are not subject to the limitations applicable to personal casualty and theft losses. The loss is deductible as an itemized deduction. It is not subject to the 10% of adjusted gross income reduction or the $100 reduction that applies to many personal casualty and theft loss deductions. A theft loss deduction that creates a net operating loss for the taxpayer can be carried back three years and forward 20 years. This enables a victim to get a refund on prior taxes paid for those prior years.

The theft loss is deductible in the year the fraud is discovered, except to the extent the investor has a claim against the Ponzi schemer with a reasonable prospect of recovery. The IRS says that determining the year of discovery and applying the “reasonable prospect of recovery” test to any particular theft is highly fact-intensive and can be the source of controversy.

Irs Loss From Theft Rules

To help Ponzi scheme victims, the IRS has created a special “safe-harbor rule” under which it will automatically accept Ponzi-type theft losses. Under this rule, the IRS will deem the loss to be the result of theft if: (1) the scheme’s promoter was charged under state or federal law with fraud, embezzlement, or a similar crime; or (2) the promoter was the subject of a state or federal criminal complaint alleging commission of such a crime, and (3) either there was some evidence of an admission of guilt by the promoter or a trustee was appointed to freeze the assets of the scheme.

The amount of the theft loss includes the investor's unrecovered investment, including income as reported in past years. Defrauded investors generally can claim a theft loss deduction not only for the net amount invested, but also for the so-called “fictitious income” that the scheme’s promoter credited to the investor’s account and which the investor reported as income on his or her tax returns for years prior to discovery of the scheme. For more details, see IRS Revenue Ruling 2009-9 and IRS Revenue Procedure 2009-20.