Claiming crypto scam losses as a theft in tax deductions

[taxtattoo]

Hello,

I looked at some previous posts with a similar question. I have been scammed in a crypto pig butchering scam in 2024 and lost a hefty amount of $85k. This has since been reported to FBI, IC3, and other major sites.

I came across this site where it seems possible to claim these losses as theft.  Wanted to get inputs from fellow tax pros if this is possible and be able to claim the full or 95% of the amount as a deduction. Are there any audit alerts I should be aware of? Is this a legit website?

https://www.taxnotes.com/featured-news/tax-pros-welcome-clarity-scam-theft-loss/2025/03/14/7rnbr

I tried in Turbotax as theft. It looks like personal property theft is not deductible but business or investment losses are deductible. Can crypto scam be considered an investment theft?

[rinkuamit]

i am in same boat as you, were you able to find out more info on this?

[KristinaK]

The Internal Legal Memorandum (ILM) is basically an internal legal advice document for the IRS's use. It is not a binding document for courts. So, the IRS may or may not accept it as a position taken on the tax return. 

One important item of that memo is that the investment must have been made with a for-profit motive in mind. As opposed to buying crypto so that you can pay for pizza with it, for example. 

Thus, if you go that route, make sure that you have substantiation to show the IRS your intentions behind the acquisition of the crypto. 

Another option is to treat the loss as a worthless investment (if it was an investment) and take a capital loss on your tax return. The deduction will be limited to up to $3000 a year (the remainder carried forward). 

@taxtattoo 
@rinkuamit