The TCJA Didn’t Kill All Theft Deductions — Here’s What Still Qualifies

One of the most widespread misunderstandings in tax practice today is the belief that the Tax Cuts and Jobs Act of 2017 eliminated all theft loss deductions for individuals. Many CPAs and tax preparers tell clients this — and they are only partially correct. The TCJA significantly restricted one type of theft deduction, but it left another entirely intact. If you lost money to investment fraud, your deduction may still be fully available.

What the TCJA Actually Changed

The Tax Cuts and Jobs Act, enacted in December 2017, amended IRC Section 165(h), which governs casualty and theft losses for personal property. Prior to the TCJA, individuals could deduct personal theft losses (subject to a $100 floor and a 10%-of-AGI threshold). After the TCJA, these personal casualty and theft deductions are only available for losses attributable to federally declared disasters — and only through 2025 under the current law.

This is the provision most CPAs are thinking of when they say “the TCJA eliminated theft deductions.” And for personal theft — a home burglary, for example — they are right.

What the TCJA Did Not Change

The TCJA made no changes to IRC Section 165(c)(2), which covers losses incurred in transactions entered into for profit. This is the provision that applies to investment fraud — and it survived the TCJA completely intact.

The key statutory distinction is this:

• 165(h): Personal casualty and theft losses — severely restricted by TCJA, now limited to federally declared disasters
• 165(c)(2): Losses from transactions entered into for profit — unchanged by TCJA, still fully available for investment fraud victims

When you were defrauded in what you believed was an investment — whether crypto, a Ponzi scheme, a fake trading platform, or a business opportunity — your loss falls under 165(c)(2), not 165(h). The TCJA simply does not apply.

IRS Guidance Confirming Investment Losses Remain Deductible

The IRS has not issued post-TCJA guidance expressly restricting Section 165(c)(2) investment fraud losses. To the contrary:

• Revenue Ruling 2009-9 and Revenue Procedure 2009-20, issued in the wake of the Madoff Ponzi scandal, established that investment fraud losses are deductible theft losses — and this guidance has not been withdrawn or superseded.
• The IRS’s own Internal Revenue Manual continues to acknowledge the distinction between personal and investment theft losses.
• Tax courts have continued to allow Section 165(c)(2) deductions for investment fraud losses in cases decided after the TCJA was enacted.

Why the Confusion Persists

The misconception is understandable. The TCJA’s changes to theft and casualty loss rules were dramatic and widely publicized. Many CPAs updated their knowledge of the general rule (Section 165(h) restricted) without deeply researching the exception (Section 165(c)(2) still available). As a result, scam victims are routinely told they have no deduction — and they walk away from potentially tens of thousands of dollars in tax relief.

This is one of the core reasons Shurek Accounting & Tax focuses specifically on IRC 165 cases. Scam victims deserve accurate advice from CPAs who understand the nuance of this area of law.

What You Need to Qualify Under 165(c)(2)

To claim a deduction under Section 165(c)(2), you must establish:

• Profit motive: You entered into the transaction with the expectation of financial gain (investment intent)
• Theft or fraud occurred: The loss resulted from a criminal act — fraud, theft, or misrepresentation
• Loss is sustained: The loss is closed and completed with no reasonable prospect of recovery
• Amount is substantiated: You have records documenting the amount transferred and any amounts received back

Getting a Second Opinion

If a CPA or tax preparer told you after 2017 that you have no theft loss deduction, it is worth getting a second opinion from someone who specializes in IRC Section 165. The difference between a correct and incorrect answer here could be a deduction worth six figures — or more — for victims of significant investment fraud.