Can You Write Off Stolen Money? Business, Ponzi, and Personal

You can write off stolen money on your federal tax return only when it was taken from your business or from an investment you made to earn a profit. If the money was personal — cash from your wallet, funds drained from your checking account by a scammer, valuables taken from your home — the federal deduction is off the table through 2025, and the One Big Beautiful Bill Act made that restriction permanent starting in 2026. The purpose of the money at the time it was stolen decides everything.

Business Theft Losses

Money or property stolen from a trade or business is fully deductible against ordinary income. That covers employee embezzlement, vendor fraud, stolen inventory, and cash taken from the register. The deduction sits under Internal Revenue Code Section 165, and business losses are not subject to the percentage-of-income limits that apply to personal losses.¹

The timing rule surprises a lot of owners. You deduct the loss in the year you discover it, not the year the theft occurred.² An employee who skimmed $200,000 over five years produces one deduction in the year you catch on. You do not amend the prior returns.

The deductible amount is the lesser of the property’s adjusted basis or the drop in fair market value caused by the theft, minus any insurance or other reimbursement you receive or reasonably expect to receive.² For stolen cash, basis equals the face value taken. If an insurance claim is still open and you have a reasonable prospect of recovery, you have to wait for it to settle before claiming what remains.³

Report the loss on Form 4684 (Casualties and Thefts). Sole proprietors carry the result to Schedule C; other business entities push it through the appropriate business return.²

Investment Fraud and Ponzi Schemes

Money lost to a fraudulent investment is also deductible under Section 165, even when the investment wasn’t part of a business you actively ran.¹ The test is whether you handed over the money expecting to make a profit. If yes, the loss qualifies as one entered into for profit rather than a personal loss.

For Ponzi-type schemes, the IRS provides a safe harbor under Revenue Procedure 2009-20 that lets qualifying investors deduct a set percentage of their net investment without litigating every element of the theft:⁴

95% of net investment if you are not pursuing any third-party recovery, such as suits against feeder funds or banks.
75% of net investment if you are pursuing or intend 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, any additional contributions, income you reported on prior returns from the scheme, withdrawals, and expected recoveries.⁵

If you claim a fraudulent-investment theft loss without using the safe harbor, Form 4684 Section B, line 19 requires the name, taxpayer identification number if known, and address if known of the person or entity that ran the scheme.⁵

Crypto Scams and the Romance-Scam Line

Crypto theft and online investment scams follow the same profit-motive test. If you sent cryptocurrency to a platform or arrangement expecting a return and the operation turned out to be fraudulent, that loss is a Section 165(c)(2) transaction entered into for profit. The IRS confirmed in Chief Counsel Advice 202511015 that victims of certain investment scams, including “pig butchering” schemes, may claim theft losses when the underlying transaction was profit-motivated.

Romance scams and kidnapping-for-ransom scams do not qualify. The money in those cases is sent for personal reasons rather than as an investment, so the loss is treated as a personal casualty loss, which is not deductible under current law.

Personal Theft Losses

Cash stolen from your wallet, jewelry taken from your house, a car taken from the driveway, an identity thief draining your account — none of it is deductible on your federal return. The Tax Cuts and Jobs Act suspended personal casualty and theft loss deductions starting in 2018, allowing them only for losses attributable to federally declared disasters.³ That limit was scheduled to expire after 2025, but the One Big Beautiful Bill Act made it permanent. Starting in 2026, state-declared disasters are also recognized, but the restriction on ordinary personal theft losses stays in place.

One narrow opening exists. If you have personal casualty gains for the year — usually from an insurance payout that exceeds your basis in damaged property — you can offset those gains with personal theft losses.² That combination is uncommon.

Theft in a Federally Declared Disaster Area

If the theft happened in a federally declared disaster area, you can still deduct it. Check the appropriate box on Form 4684 and enter the FEMA declaration number.² Two reductions apply:

The first $100 of each separate theft or casualty event is not deductible.²
After the $100 reduction, total personal casualty and theft losses for the year are deductible only to the extent they exceed 10% of your adjusted gross income.¹

A taxpayer with $80,000 in AGI and a $12,000 qualifying theft loss subtracts $100 to reach $11,900, then subtracts $8,000 (10% of AGI), leaving a $3,900 deduction. Smaller qualifying losses are often wiped out entirely by these two floors.

How the Deduction Is Calculated

For any theft loss that qualifies — business, investment, or disaster-related personal — the calculation is the same. Start with the lesser of the property’s adjusted basis or the decrease in fair market value from the theft, then subtract insurance or other reimbursement you received or expect to receive.²

Adjusted basis is usually what you paid plus improvements, reduced by any depreciation already claimed on business property. For stolen cash, basis equals the amount taken. The fair market value comparison matters mainly for property that had lost value before the theft: if you paid $5,000 for equipment worth $2,000 when it was stolen, the loss is capped at $2,000 before any reimbursement.

Business and investment theft losses are exempt from the $100 floor and the 10% AGI threshold. The unreimbursed loss reduces taxable income dollar for dollar.

Insurance Reimbursement

You cannot claim the deduction while an insurance claim is pending and you have a reasonable prospect of recovery. Wait until it settles.³ If the insurer pays less than the property’s adjusted basis, the shortfall is your deductible loss. If the insurer pays more than basis — which can happen with property that appreciated — you have a taxable gain that goes on Form 4684.

Proving Basis When Receipts Are Gone

Theft victims often can’t produce original receipts, especially when the stolen property included the records. The IRS accepts secondary evidence: statements from contractors who made improvements, county assessor records showing historical value, written descriptions from friends or family who saw the property, and bank or credit card statements showing the original purchase.⁶ Perfection is not required, but a bare claim of value with nothing behind it will not survive an audit.

If You Later Recover the Money

Recovering stolen funds after you deducted the loss can generate taxable income, but only up to the tax benefit you actually got from the original deduction. Section 111’s tax benefit rule requires you to include the recovery in gross income only to the extent the deduction previously reduced your tax.² If the deduction produced no benefit — because your income was already zero or the loss exceeded your income — the recovery isn’t taxed.

An example: you deducted a $10,000 theft loss, but AGI limits meant only $4,000 actually reduced your taxable income. Two years later you recover $6,000 from the thief. Only $4,000 of that recovery is taxable; the remaining $2,000 is excluded. The taxable portion is reported in the year you receive it at your ordinary rates, and you do not amend the earlier return.

Interest included in a judgment or settlement is separate. It’s reported as taxable interest income, not as a recovery of the stolen amount.⁷

What to File and What to Keep

All theft losses are reported on Form 4684.² Business losses flow through the relevant business schedule. Investment theft losses go through Section B and, for individuals, on to Schedule A. Ponzi safe harbor losses go through Section C.

The IRS requires you to show 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 expectation of recovery.² A police report is the strongest single document, but it’s not the only acceptable evidence. Bank statements showing unauthorized withdrawals, correspondence with a brokerage about a fraud, and screenshots of an online scam can all support the claim. Keep purchase receipts, appraisals, photographs, and insurance records to establish basis and value.

If you discover a theft after filing, you can file an amended return within three years of the date you filed the original return, or two years from the date you paid the tax, whichever is later.⁸

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