Investment Scam Losses Stay Deductible as Tax Court Allows $925,000 Claim

A recent Tax Court case has renewed attention on when investment scam losses may be deductible. In Deutsch v. Commissioner, the Tax Court allowed a $925,000 theft loss deduction related to a fraudulent investment transaction. Reporting on the case notes that the taxpayers claimed a theft loss connected to payments made for a supposed $70 million investment transaction that later proved fraudulent.

For Americans living abroad, this matters because scams often target internationally mobile taxpayers, retirees, and investors with cross-border accounts.

Personal Losses and Investment Losses Are Different

Not every scam loss is deductible. The IRS generally limits personal casualty and theft losses for individuals, but losses from transactions entered into for profit may be treated differently.

The IRS explains that beginning with tax year 2018, personal casualty losses are generally not deductible unless attributable to a federally declared disaster. However, special rules may apply to theft losses from Ponzi-type investment schemes.

The key distinction is whether the loss was personal or connected to a profit-seeking transaction.

Why the Deutsch Case Matters

In the Deutsch case, summaries explain that the Tax Court allowed a $925,000 theft loss even though not every transferred amount was deductible. The court reportedly distinguished between deductible theft losses and nondeductible personal living expenses.

That distinction is important. A taxpayer must show that the loss qualifies under tax rules and that the amount claimed is properly supported.

What Counts as an Investment Scam?

An investment scam may involve a taxpayer sending money for a supposed profit-making opportunity that is fraudulent. Examples can include:

• Fake foreign investment opportunities
• Fraudulent business ventures
• Ponzi-type arrangements
• Fake private equity opportunities
• False real estate investments
• Cryptocurrency investment scams
• Fraudulent lending programs
• Fake offshore funds

The fact that money was lost is not enough. The taxpayer must be able to show the nature of the transaction and the theft.

Documentation Is Critical

Taxpayers claiming a theft loss should keep detailed records, including:

• Wire transfer records
• Bank statements
• Contracts or agreements
• Emails and messages
• Promissory notes
• Marketing materials
• Police reports
• Legal filings
• Court judgments
• SEC or regulator findings
• Recovery efforts
• Insurance or reimbursement claims

The IRS may ask when the loss was discovered and whether there was a reasonable prospect of recovery.

Timing of the Deduction

The IRS states that theft losses are generally deductible in the year the taxpayer discovers the property was stolen, unless there is a reasonable prospect of recovery through reimbursement or other claims.

This timing rule can be complicated. A taxpayer may lose money in one year but discover the theft later. Pending litigation or insurance claims may delay the deduction.

Form 4684 and Reporting

Taxpayers generally use Form 4684 to report casualty and theft losses. The IRS instructions specifically direct financial scam victims to review Chief Counsel Advice 202511015 for additional guidance.

Americans abroad should not assume that a foreign scam is outside U.S. reporting. If a U.S. taxpayer claims a deduction on a U.S. return, U.S. substantiation rules apply.

Foreign Accounts and Scams

Investment scams can also affect FBAR and Form 8938 reporting. If foreign accounts were used to fund the investment, receive supposed returns, or hold related assets, those accounts may still need to be reported.

A theft loss deduction does not erase foreign account filing duties.

Get Help Before Claiming a Loss

Investment scam losses can be highly fact-specific. The tax treatment depends on the purpose of the transaction, evidence of theft, recovery prospects, timing, and documentation.

Expatriate Tax Returns helps Americans abroad review U.S. tax filing requirements, foreign accounts, investment income, and complex reporting situations.