The rules are technical, and two points decide a lot: scam losses tied to an investment are treated differently from ordinary personal theft losses, and the federal and California treatments do not always match. If you also received IRS Letter 6174 about earlier crypto activity, that is a separate issue to handle alongside the loss, not instead of it.

Because the analysis is fact-specific and the stakes are real, review it with a tax attorney before filing. Call (415) 968-1780 for a privileged consultation.

A painfully common story runs like this: someone reported their crypto correctly years ago, then lost most of it to a phishing scam or a fake investment platform, filed the loss year without claiming anything for the theft, and later received a Letter 6174. There may be money to recover here through the tax return, and there is usually a clean way to deal with the letter. The two just need to be sorted out separately and correctly.

Can you amend a prior-year return to claim a crypto scam loss?

Often, yes. If you had a deductible theft loss in a past year and did not claim it, an amended return for that year is the usual way to capture it, subject to the time limits for amending.

The threshold questions are whether the loss qualifies as a deductible theft loss at all, which year it belongs in, and how much is deductible after any prospect of recovery is accounted for. None of those are casual judgments, which is why this is worth getting right rather than guessing on a self-prepared amendment.

Why investment-scam losses are treated differently

This is the distinction that changes outcomes. For 2018 through 2025, the tax law generally suspended the deduction for personal casualty and theft losses except in federally declared disasters. Losses from a transaction entered into for profit are analyzed under a different provision, and many cryptocurrency scam losses, such as those from fraudulent investment platforms and “pig butchering” schemes, are argued to fall on the profit-motive side rather than the suspended personal side.

Whether a particular loss qualifies depends heavily on the facts of how the scam was structured and how the taxpayer was drawn in. We cover the mechanics in depth in how to claim a crypto theft-loss deduction for pig butchering scams, and our pig butchering crypto scam practice page describes how we handle these matters.

The timing rules that trip people up

A theft loss is generally deductible in the year you discover it, not necessarily the year the money left your account, and only to the extent there is no reasonable prospect of recovery. If you still had a realistic chance of getting funds back in the discovery year, part or all of the loss may belong in a later year instead.

Pinning the loss to the correct year is often the difference between an amendment that holds up and one that invites questions, and it is the step people most often get wrong on their own.

Where Letter 6174 fits in

If you received Letter 6174, remember that it addresses whether your crypto activity was reported, which is a different question from whether you can claim a theft loss. Do not let the letter distract you from a deduction you may be owed, and do not let the deduction distract you from making sure your prior reporting was complete.

Both can be true at once: you may need to correct how earlier dispositions were reported and claim a loss you missed. For what the letter means and whether it requires a response, see our hub guide, IRS Letter 6174 (crypto): what it means and what to do.

Federal and California treatment can differ

California does not automatically follow every federal change, and its treatment of casualty and theft losses has not tracked the federal rules in lockstep in recent years. That means the same scam loss can produce a different answer on your federal return than on your California return, and an amended federal return does not automatically fix the state side.

Both need to be looked at together so you claim what you are entitled to in each system without creating an inconsistency. This is a point to confirm with counsel for your specific years, because the state rules have their own limits and carryover mechanics.

What to gather before you amend

A theft-loss position is only as strong as its record. Helpful documentation usually includes evidence that a theft occurred and that it was illegal under the applicable law, the dates you sent funds and the date you discovered the fraud, the amounts and your cost basis in the lost assets, and a record of any recovery efforts and what, if anything, you expect to get back.

Pulling this together before filing both strengthens the claim and lets your attorney place the loss in the right year. Our cryptocurrency accounting and audits team handles the reconstruction side when records are incomplete.

Talk to a crypto tax attorney before you file

If you lost crypto to a scam and want to know whether an amended return can recover a theft loss, and how your Letter 6174 fits in, get a privileged assessment first. Schedule a paid, privileged consultation with Kugelman Law by calling (415) 968-1780 or visiting our contact page.

In one federal matter, two IRS Notices of Deficiency proposing more than $557,000 across six years were settled in U.S. Tax Court down to roughly $38,000, and with avoided interest and California exposure the client effectively saved over $1.2 million. Results depend on specific facts. Past results do not guarantee future outcomes.

Frequently asked questions

Can I claim a tax deduction for cryptocurrency lost to a scam?

Possibly. Losses from fraudulent investment schemes are often analyzed as theft losses incurred in a transaction entered into for profit, which are treated differently from ordinary personal theft losses. Whether your loss qualifies depends on the specific facts, so it should be assessed before you rely on it.

Can I amend a prior-year return to claim a crypto theft loss I missed?

Usually yes, within the time limits for amending returns, if the loss qualifies and belongs in that year. The key issues are qualification, the correct year of deduction, and whether there was any reasonable prospect of recovery. These are best confirmed with counsel before filing.

What year do I deduct a crypto scam loss?

Generally the year you discover the theft, and only to the extent there is no reasonable prospect of recovery at that time. If recovery was still realistically possible, some or all of the loss may belong in a later year. Placing it correctly is one of the most common sticking points.

Is the California treatment of a crypto scam loss the same as federal?

Not necessarily. California has not always conformed to the federal casualty and theft-loss rules, so the same loss can produce a different result on your state return. An amended federal return does not automatically correct the California side, so both should be reviewed together.

I got Letter 6174 and also lost crypto to a scam. Which do I deal with first?

They are separate issues and are usually handled together. Letter 6174 concerns whether your activity was reported; the scam loss concerns a deduction you may be owed. A privileged review can address your reporting and your potential theft loss at the same time.

About the author

Alex Kugelman is the founder and managing attorney of Kugelman Law and is nationally recognized for cryptocurrency tax. He has spoken on digital-asset tax and IRS enforcement on the Bitcoin.tax podcast and The Mark Milton Show. With nearly two decades of federal tax controversy experience, he is admitted in California and before the U.S. Supreme Court, the U.S. Tax Court, and the U.S. District Court for the Northern and Eastern Districts of California, and served as San Francisco Chair of the Federal Bar Association Tax Division in 2018. For matters that reach into IRS examinations, his colleague Otto Bosch, a former IRS Revenue Agent from the Global High Wealth group, leads the firm’s federal audit-defense work.

This article is attorney advertising and general information, not legal advice. Whether a loss is deductible, in which year, and how federal and California rules apply are fact-specific legal determinations. Contacting Kugelman Law does not create an attorney-client relationship.

The rise of “pig butchering” crypto scams has left thousands of investors financially devastated. These sophisticated, long-con frauds build trust over months, convincing victims to invest huge sums into fake platforms before vanishing with the funds.

If you have fallen victim to one of these schemes, you know the pain is not just emotional—it is a financial catastrophe. However, there may be a way to mitigate the damage through the tax code.

Under Internal Revenue Code (IRC) § 165(c)(2) and recent IRS guidance, victims of fraudulent investment schemes may be eligible to claim a theft loss deduction. At Kugelman Law, we specialize in helping clients substantiate these claims to validly reduce their taxable income.

The Legal Basis: IRC § 165(c)(2) and IRS Guidance

Historically, the Tax Cuts and Jobs Act of 2017 suspended “personal casualty and theft losses” for individuals from 2018 through 2025. This led many to believe that all theft losses were non-deductible. This is not true.

The suspension applies to personal losses (like a stolen watch or a burglary). It does not apply to losses incurred in a “transaction entered into for profit.”

A recent IRS Chief Counsel Memorandum (No. 202511015) specifically analyzed the tax treatment of pig butchering crypto scams. The IRS concluded that because victims transferred funds with the clear intent to invest and generate a profit, these losses can be classified as investment theft losses under IRC § 165(c)(2), rather than disallowed personal losses.

Key Eligibility Requirements

To claim this deduction successfully, you must meet specific criteria:

• Proven Theft: You must show that the taking of your property was illegal under state law and done with criminal intent (e.g., fraud, larceny, or embezzlement).
• Profit Motive: You must demonstrate that your primary motive for transferring the funds was to make an investment profit. This distinguishes your case from “romance scams” where funds are sent as gifts or for personal help, which the IRS typically disallows.
• No Reasonable Prospect of Recovery: You must determine that the loss is permanent and that there is no likely path to recovering your funds from the scammers or a third party (like insurance).

How Kugelman Law Can Help

Claiming a theft loss deduction is a high-stakes tax position. It requires meticulous documentation to survive IRS scrutiny, similar to the rigor required for cryptocurrency audits. We help victims report this loss correctly and defensibly.

1. Tax Return Preparation & Reporting

We can prepare your tax return to properly report the theft loss. This involves calculating your “cost basis” (the actual amount of money you put in, not the fake “gains” shown on the scam website) and filing the appropriate forms to claim the deduction against your taxable income.

2. Legal Opinion Letter

For significant losses, we highly recommend a formal Legal Opinion Letter. This document details the facts of your case, applies the relevant tax law (including the new Chief Counsel Memo), and provides a legal conclusion on your eligibility for the deduction. This serves as your primary defense should the IRS ever question the claim.

An opinion letter serves two primary purposes: (1) reasonable reliance defense against penalties if a tax agency audits the return and proposes penalties and (2) real time documentation and analysis that is ready to go in the event there is an audit.  

3. Comprehensive Package

We offer a combined service that includes both the legal opinion letter and the full preparation of your tax return.

Necessary Documentation

To substantiate your claim, we will need to compile a comprehensive evidence file, including:

• Complete Account Statements: Bank ledgers and crypto exchange records showing the trail of funds moving from your possession to the scammer’s wallets.
• Proof of Investment Intent: Screenshots of the fake trading platform, “account balances,” and logs of communications with the scammers where investment returns were discussed.
• Law Enforcement Reports: To prove the loss was a “theft” and not just a bad investment, you must file reports with authorities. We recommend filing with:
  • FBI via IC3: https://www.ic3.gov/
  • Secret Service Cyber Crime Task Force: https://www.secretservice.gov/
  • FTC Report Fraud: https://reportfraud.ftc.gov/
  • Your local police or sheriff’s department.

A Note on Civil Recovery

Please note that Kugelman Law focuses exclusively on the tax reporting and deduction aspect of your loss. We generally do not handle civil asset recovery (suing to get the money back) on a contingency basis.

However, we can refer you to attorneys who specialize in civil recovery for these types of fraud.

Take the Next Step

If you have suffered a loss from a pig butchering or crypto investment scam, do not let the tax implications add insult to injury. You may be able to recoup some of your losses through a lower tax bill. If you need help, our tax resolution attorneys can guide you through the process.

Contact Kugelman Law today to schedule a consultation and discuss your eligibility for a theft loss deduction.

Disclaimer: This post is for informational purposes only and does not constitute legal or tax advice. Consult a qualified professional for guidance on your specific situation.