Stolen money should not be taxable income

In brief: H.R. 9500, the Tax Relief for Fraud Victims Act, would repeal the limit on personal casualty and theft-loss deductions, let fraud victims choose the year a theft loss counts, and waive the 10 percent early-withdrawal tax on fraud-related retirement distributions. It passed the House 408–17 on September 15, 2026, and was referred to the Senate Finance Committee on September 16.

The problem

Investment fraud has industrialized. Organized rings run long-con schemes that build trust over months and then drain everything, and older Americans are their favorite targets.

The tax code then victimizes these people a second time. Since the Tax Cuts and Jobs Act suspended the personal theft-loss deduction, most fraud victims cannot deduct what was stolen. Worse, victims who were manipulated into withdrawing retirement savings owe full income tax on those withdrawals — plus early-withdrawal penalties if they are under 59 and a half — on money that went straight into a criminal’s pocket.

Current law draws one arbitrary line. Under IRS Chief Counsel guidance (CCA 202511015), a victim who handed money to a scammer expecting a profit — a fake trading platform, a bogus “broker” — may still deduct the loss under section 165(c)(2), because the transaction was entered into for profit. A victim manipulated without a profit motive — a romance scam, a fake kidnapping call, an imposter “government agent” — has a personal casualty loss that the law now generally disallows. Two victims of the same criminal ring can get opposite tax treatment depending on which lie the criminal chose to tell.

And the disallowance is no longer temporary. The Tax Cuts and Jobs Act suspended personal casualty and theft losses only through 2025; the One Big Beautiful Bill Act (P.L. 119-21, signed July 4, 2025) made that suspension permanent. Without new legislation, the double punishment of fraud victims is now the permanent baseline of the tax code.

A retiree who loses $400,000 to a scam can face a six-figure tax bill on the theft. That is not a loophole or an edge case. It is the routine operation of current law, and it is indefensible.

What H.R. 9500 actually does

The Tax Relief for Fraud Victims Act is short — a title section and one operative section — and every clause is aimed at the same target. What follows tracks the bill text as passed by the House; the official status page is on Congress.gov.

Restores the personal theft-loss deduction

Section 2(a) strikes section 165(h)(5) of the Internal Revenue Code — the provision that, since 2018, has disallowed personal casualty and theft losses unless they are attributable to a declared disaster. Repealing it restores the deduction fraud victims relied on before 2018, and it ends the all-or-nothing line described above: the romance-scam victim is no longer shut out entirely, and can deduct the theft again under the code’s pre-2018 rules for personal losses.

Lets victims claim the loss in the right year

Under current law a theft loss is treated as sustained in the year the taxpayer discovers it. Section 2(b) keeps that rule and adds an election for losses arising from theft involving fraud, deceit, or misrepresentation: the victim may instead treat the loss as sustained in the year it occurred. Long-running scams often drain accounts across several years before anyone notices — the election lets victims put the deduction in the year that actually carries the income it should offset.

Keeps the refund window open

A victim who discovers a years-old fraud can find the normal refund deadline already closed. The bill provides that, for these losses, the refund-claim period under section 6511 does not expire earlier than one year after the date the taxpayer discovers the loss — so discovering the theft late does not mean forfeiting the remedy. For fraud losses from 2021 through 2025 that were discovered before the bill becomes law, that year runs from the date of enactment instead.

Ends the tax penalty on fraud-coerced retirement withdrawals

Section 2(c) adds a new exception to the 10 percent early-withdrawal tax — section 72(t)(2)(O) — for distributions attributable to a theft loss involving fraud, deceit, or misrepresentation. Victims who were manipulated into pulling retirement money may also repay the distribution within one year after discovering the loss, and claim a refund of the tax already paid on what they repay, under the same extended refund window.

Sets a deadline for the IRS

The House-passed text adds a processing deadline that the introduced bill did not have. Section 2(e) requires the IRS to process refund claims for the retroactive losses described below, and claims tied to fraud-related retirement distributions, within two years after the claim is filed.

When it takes effect

The changes generally apply to losses sustained in taxable years beginning after December 31, 2025. The House-passed text reaches back further for two kinds of loss sustained after December 31, 2020, and before January 1, 2026: theft losses involving fraud, deceit, or misrepresentation, and losses from pyrrhotite-damaged concrete foundations — the “crumbling foundations” problem. The retirement-withdrawal relief applies to distributions made after December 31, 2020.

Who this helps

Consider a 57-year-old teacher who is convinced by a fake investment platform — complete with statements, a dashboard, and a patient “advisor” — to move $400,000 from her IRA into what she believes is a brokerage account. The money is gone the moment it leaves.

Under current law, the withdrawal is taxed as $400,000 of ordinary income, and because she is under 59 and a half she also owes the 10 percent additional tax — $40,000 — on top of her income tax. Because she expected a profit, the IRS guidance above suggests her theft loss may still be deductible — but whether it is depends on her facts, and a neighbor who lost the same amount to a romance scam would get no deduction at all. Either way, the $40,000 penalty stands, the refund clock may already be running, and nothing in current law lets her restore the account.

Under H.R. 9500, the theft-loss deduction no longer turns on which lie the criminal told: it offsets the phantom income. The $40,000 penalty disappears. Anything she manages to recover can go back into her IRA within a year of discovery, with the tax on the repaid amount refunded, and the refund window stays open at least a year past the day she learned the truth. She is not made whole — no tax provision can undo a theft — but the government stops collecting a windfall from her worst day.

Status and next steps

H.R. 9500 was introduced on June 29, 2026 by Rep. Max Miller (R-OH-7) with Rep. Tom Suozzi (D-NY-3), and on July 1, 2026 the House Ways & Means Committee ordered it reported, in the nature of a substitute, by a recorded vote of 39–0. On September 15, 2026 the full House passed it, as amended, by a vote of 408–17 under suspension of the rules, and on September 16 the Senate received it and referred it to the Committee on Finance. Nobody’s constituents are safe from this fraud, which is exactly why members of both parties can stand behind the fix. The fight now moves to the Senate, where a related proposal — S. 1773, the Tax Relief for Victims of Crimes, Scams, and Disasters Act — shows the issue already has an audience.

Fraud in digital assets makes the need urgent. Crypto investment scams take billions from Americans every year, and their victims face the same double punishment: the loss itself, then the tax bill. Digital Asset Tax Advocacy supports this bill, is working with congressional offices to make sure it reaches these victims, and urges Congress to pass it.

A note on what this page is: Digital Asset Tax Advocacy is a 501(c)(4) advocacy organization, and this page is advocacy — we describe the law accurately, and we are asking Congress to change it. Nothing here is tax or legal advice; how current law applies to any particular victim depends on their facts.

Last reviewed July 30, 2026 · Reviewed by Andrew Gordon, JD, CPA