Theft by email scam

[Pvpastar]

In 2015 while purchasing a house my real estate agent's email was hacked and used by scammers to falsely advise me to wire a $15,000 deposit.  The theft was subsequently investigated by the state police.  I filed a lawsuit against the real estate firm (they claimed to have "state of the art" internet services") and subsequently settled for $7,500 after filing a lawsuit.  The $7,500 settlement was reported on a 1099misc.  Since the money lost was from a Roth account, the taxes had already been paid.  If I report the 1099misc, it seems like I will be double taxed.  I never declared a deduction for the original loss because of the ongoing investigation and possibility of recovery through lawsuit.

[LudwigVan_fan]

What year did the settlement take place?  If 2018, please refer to Publication 547 for 2018.  Claiming a theft loss in 2018 is not a possibility.  But it appears you might be able to offset the 1099 income by the loss, you just can't claim the remainder of the loss.

https://www.irs.gov/pub/irs-pdf/p547.pdf

In my opinion, the $15,000 was stolen in 2015.  That would normally be the year you would claim the loss.  I agree that since you sued, your loss had not been fully determined since there was the possibility to recover amount(s) of the loss, and the loss was undetermined.  However, I think an argument could be made that now you have finalized the loss and that $7,500 could be claimed on an amended 2015 return for a theft loss of the $7,500.  If you timely filed 2015, you would have until April 15, 2019 to file an amended return.

Having said that, there is the counter argument that presumably the loss is finalized and should be claimed in the year in which the lawsuit was settled; as that is the time when the actual loss has been determined.

[NCperson]

rather than 'arguments and opinions', the direction in the IRS pub 4345 is rather clear on the approach.

https://www.irs.gov/pub/irs-pdf/p4345.pdf

Loss-in-value of property
• Property settlements for loss in value of property that are less than the adjusted basis of your property are
not taxable and generally do not need to be reported on your tax return.

[LudwigVan_fan]

Yes, the settlement is non-taxable since it is less than the value of the money stolen.  However, the timing of when to take or claim the balance of the loss ($7,500) as a theft loss is still up in the air.