Frost Law
The IRS recently released Chief Counsel Advice Memorandum (“CCA”) 202511015, dated January 17, 2025. In the CCA, the IRS describes five common scams and discusses whether the losses resulting from each would be deductible under federal tax law as a theft loss.1
The CCA confirms that the IRS considers losses from pig butchering scams to constitute losses from a transaction entered into for profit, and thus deductible under section 165(c)(2). This position is consistent with what Frost Law has advised clients.2 In addition to confirming theft loss treatment for these situations, the IRS clarified three important points about the deduction.
The CCA also discusses the compromised account scam, which involves a victim who is initially contacted by a scammer claiming to be a fraud specialist at the victim’s financial institution. The scammer tells the victim that his or her account at the financial institution has been compromised and induces the victim to transfer his or her account balance to a new account that the scammer represents is safe from compromise. However, this new account is actually controlled by the scammer, and once the victim’s funds are transferred to this new account, the scammer empties the account and absconds with the funds.
The IRS considers the loss from a compromised account scam to be a loss from a transaction entered into for profit because the IRS considers a taxpayer to have a profit motive when investing in financial accounts, including retirement accounts. Thus, the action by the victim to protect their funds is a continuation of that profit motive.
The CCA also discusses the phishing scam, in which a scammer gains access to the victim’s financial accounts through hacking or social engineering. Once the scammer has control of the victim’s accounts, the scammer distributes or withdraws funds without the victim’s approval or action.
This scam is unique among those that the IRS discusses in the CCA, primarily because in this scam the victim is not induced or coerced into withdrawing or distributing funds from his or her account. Instead, the scammer takes control over the account and withdraws the funds without the victim’s intervention. This distinction is meaningful based on existing Tax Court precedent addressing fraudulent withdrawals from retirement or IRA accounts.3 The Tax Court considers whether the victim either requested or authorized the distribution, as well as whether he or she received any economic benefit from the distribution. If the victim did not request or consent to the distribution, and did not receive any economic benefit, the victim will generally not be required to include the amount of the distribution in taxable income.
One interesting result of this is that if the victim does not pay tax on the amount of the distribution, he or she does not have a basis in the assets to use to determine the amount of the theft loss deduction. For this victim, if the distribution is excluded from taxable income there is no ability to deduct the loss.
The IRS also discussed romance scams and kidnapping scams in the CCA. For those particular scams, the IRS focused on the fact that the victim generally does not have a profit motive when they send funds to the scammer.
Prior IRS guidance discussing the deductibility of losses in so-called “Ponzi scheme” transactions supported the deductibility of losses from pig butchering scams.4 With the release of the CCA, the IRS has informally confirmed this analysis and even broadened the view to conclude that a “transaction entered into for profit” can be viewed broadly, and actions taking to protect investments or retirement accounts fit under that category of transactions.
Notably, the victim in the compromised account scam does not undertake the specific act of moving their retirement or investment funds with the current intent of making a profit. Rather, the victim is taking action to protect existing investment assets from being stolen. The IRS imputes this profit motive based on the nature of the underlying asset; that is, the IRS considers a taxpayer to have a profit motive when establishing and investing in financial and retirement accounts, and this motive applies to the victim in the compromised account scam because the “transaction entered into for profit” is considered to be the entire transaction, including the actions taken to protect the assets. This does raise the question whether a victim’s actions to protect other assets, such as cash or checking accounts or other ostensibly non-investment assets would also be treated as a part of a transaction entered into for profit.
For victims of the phishing scam, the IRS analysis in the CCA almost seems to set up a sort-of optionality, where the victim might decide to include the amount of the IRA or retirement account in taxable income in order to establish a basis, and then take the deduction for the loss from a transaction entered into for profit. Alternatively, if the victim takes the position that the distribution is not included in income because of the fraudulent activity that caused the distribution, the victim would not be able to take the deduction but presumably would not need the deduction. A victim in this situation may need to consider whether one result provides any benefit over the other.
Online scams have proliferated in recent years, and sometimes it seems like a new scam text or phishing phone call comes every day. Many such scams are easy to recognize and ignore, but as scammers become more sophisticated and utilize tools such as AI and information farmed from the dark web, more and more people unfortunately fall victim to these scams.
When a person does fall victim to an online scam and loses money to the scammer, the possibility of recovering any of the lost money is very low. For victims who may have lost money that was originally in a retirement account or IRA, tax must still be paid on the amount of the distribution even though the funds were ultimately stolen.
For victims of pig butchering or other investment or profit-making scams, strong arguments support the ability to deduct any such losses as resulting from a transaction entered into for profit. The CCA is a welcome indication that the IRS shares this view.
The IRS recently released Chief Counsel Advice Memorandum (“CCA”) 202511015, dated January 17, 2025. In the CCA, the IRS describes five common scams and discusses whether the losses resulting from each would be deductible under federal tax law as a theft loss.1
The CCA confirms that the IRS considers losses from pig butchering scams to constitute losses from a transaction entered into for profit, and thus deductible under section 165(c)(2). This position is consistent with what Frost Law has advised clients.2 In addition to confirming theft loss treatment for these situations, the IRS clarified three important points about the deduction.
The CCA also discusses the compromised account scam, which involves a victim who is initially contacted by a scammer claiming to be a fraud specialist at the victim’s financial institution. The scammer tells the victim that his or her account at the financial institution has been compromised and induces the victim to transfer his or her account balance to a new account that the scammer represents is safe from compromise. However, this new account is actually controlled by the scammer, and once the victim’s funds are transferred to this new account, the scammer empties the account and absconds with the funds.
The IRS considers the loss from a compromised account scam to be a loss from a transaction entered into for profit because the IRS considers a taxpayer to have a profit motive when investing in financial accounts, including retirement accounts. Thus, the action by the victim to protect their funds is a continuation of that profit motive.
The CCA also discusses the phishing scam, in which a scammer gains access to the victim’s financial accounts through hacking or social engineering. Once the scammer has control of the victim’s accounts, the scammer distributes or withdraws funds without the victim’s approval or action.
This scam is unique among those that the IRS discusses in the CCA, primarily because in this scam the victim is not induced or coerced into withdrawing or distributing funds from his or her account. Instead, the scammer takes control over the account and withdraws the funds without the victim’s intervention. This distinction is meaningful based on existing Tax Court precedent addressing fraudulent withdrawals from retirement or IRA accounts.3 The Tax Court considers whether the victim either requested or authorized the distribution, as well as whether he or she received any economic benefit from the distribution. If the victim did not request or consent to the distribution, and did not receive any economic benefit, the victim will generally not be required to include the amount of the distribution in taxable income.
One interesting result of this is that if the victim does not pay tax on the amount of the distribution, he or she does not have a basis in the assets to use to determine the amount of the theft loss deduction. For this victim, if the distribution is excluded from taxable income there is no ability to deduct the loss.
The IRS also discussed romance scams and kidnapping scams in the CCA. For those particular scams, the IRS focused on the fact that the victim generally does not have a profit motive when they send funds to the scammer.
Prior IRS guidance discussing the deductibility of losses in so-called “Ponzi scheme” transactions supported the deductibility of losses from pig butchering scams.4 With the release of the CCA, the IRS has informally confirmed this analysis and even broadened the view to conclude that a “transaction entered into for profit” can be viewed broadly, and actions taking to protect investments or retirement accounts fit under that category of transactions.
Notably, the victim in the compromised account scam does not undertake the specific act of moving their retirement or investment funds with the current intent of making a profit. Rather, the victim is taking action to protect existing investment assets from being stolen. The IRS imputes this profit motive based on the nature of the underlying asset; that is, the IRS considers a taxpayer to have a profit motive when establishing and investing in financial and retirement accounts, and this motive applies to the victim in the compromised account scam because the “transaction entered into for profit” is considered to be the entire transaction, including the actions taken to protect the assets. This does raise the question whether a victim’s actions to protect other assets, such as cash or checking accounts or other ostensibly non-investment assets would also be treated as a part of a transaction entered into for profit.
For victims of the phishing scam, the IRS analysis in the CCA almost seems to set up a sort-of optionality, where the victim might decide to include the amount of the IRA or retirement account in taxable income in order to establish a basis, and then take the deduction for the loss from a transaction entered into for profit. Alternatively, if the victim takes the position that the distribution is not included in income because of the fraudulent activity that caused the distribution, the victim would not be able to take the deduction but presumably would not need the deduction. A victim in this situation may need to consider whether one result provides any benefit over the other.
Online scams have proliferated in recent years, and sometimes it seems like a new scam text or phishing phone call comes every day. Many such scams are easy to recognize and ignore, but as scammers become more sophisticated and utilize tools such as AI and information farmed from the dark web, more and more people unfortunately fall victim to these scams.
When a person does fall victim to an online scam and loses money to the scammer, the possibility of recovering any of the lost money is very low. For victims who may have lost money that was originally in a retirement account or IRA, tax must still be paid on the amount of the distribution even though the funds were ultimately stolen.
For victims of pig butchering or other investment or profit-making scams, strong arguments support the ability to deduct any such losses as resulting from a transaction entered into for profit. The CCA is a welcome indication that the IRS shares this view.
