How The IRS Is Helping Victims Of Pig-Butchering And Other Crypto Scams

“Pig-butchering” scams are among the fastest-growing forms of online financial fraud, often connected to crypto or so-called romance investment schemes that start on social or dating apps.

In these schemes, fraudsters build trust and lure victims into fake investment platforms that show fabricated profits before vanishing with their money.

The IRS has provided guidance that can help victims of pig-butchering scams pursue legitimate tax relief when their losses meet certain criteria. 

For years, taxpayers who fell for fraudulent investment or romance schemes were told their losses weren’t deductible because they were considered “personal.”

That changed with IRS Chief Counsel Advice 202511015, issued in 2025. 

The memorandum clarifies that certain scam victims may claim a theft-loss deduction under Internal Revenue Code §165(c)(2) when the loss arose from a profit-motivated transaction.

This interpretation is significant because it redefines how the IRS views these scams. 

Instead of labeling them as poor investment decisions, the IRS now recognizes them as thefts when the taxpayer can show genuine intent to earn profits. 

Unfortunately, romance or “kidnapping” scams are generally treated as personal casualty losses under §165(c)(3). These types of losses are not deductible under §165(h)(5), except in rare cases involving personal casualty gains or Federally declared disasters. Thus, losses due a romance scam are less likely deductible. 

Why The IRS Chief Counsel Guidance Matters

The IRS’s clarification provides a new path for taxpayers who have suffered large, unexpected losses. 

Victims may qualify for a theft-loss deduction if they can demonstrate that:

• They invested with a genuine intent to make a profit.
• The loss resulted from theft or fraud, not market fluctuation or error.
• They can substantiate their case through proper documentation.

For victims who liquidated 401(k) or brokerage accounts to fund these fake investments, this deduction could offset taxable income from those withdrawals. 

That can mean the difference between financial recovery and lingering tax debt.

Building A Case For A Theft-Loss Deduction The IRS Will Accept

Although the new guidance opens the door to relief, it also raises the bar for proof. 

The IRS expects a well-documented case showing exactly what occurred, including:

• Official reports. File with the FBI’s Internet Crime Complaint Center (IC3.gov) and your local police department to confirm that a theft occurred.
• Evidence of communication. Keep texts, chat logs, and emails that illustrate how the fraud developed.
• Transaction records. Save bank statements, wire confirmations, and crypto wallet activity showing when and where funds were transferred.
• Timeline. Note when you first discovered the theft. That determines which tax year the deduction applies to.

Each element builds credibility. The more organized and complete your documentation, the stronger your claim will be.

When An IRS Audit Related To A Tax Scam Might Work In Your Favor

Taxpayers often worry about the possibility of an IRS audit, but in theft-loss cases, a review can actually help. 

An audit allows a skilled tax attorney to present the full context, organize evidence, and show that the case meets the IRS standard for a theft-loss deduction.

Attorney Sammy Kim has already helped clients file theft-loss claims under the new guidance. 

Her approach often includes coordination with the Taxpayer Advocate Service (TAS) and a Collection Due Process (CDP) hearing to ensure cases are reviewed by different independent agents thoroughly and fairly.

Why You Need An Experienced IRS Tax Attorney

Proving a theft-loss claim requires more than a police report. 

It involves strict timing rules, detailed documentation, and technical IRS procedures.

A qualified tax attorney can:

• Determine whether your situation qualifies for theft-loss treatment.
• Prepare or amend tax returns to claim the deduction correctly.
• Communicate with IRS agents or examiners during review.
• Coordinate with TAS or an Appeals Officer during a CDP hearing for additional administrative support.

Because the process is evidence-driven, professional guidance can make the difference between a successful deduction and a rejected claim.

Don’t Miss The Year-End Deadline For Theft-Loss Deductions

For losses discovered in 2025, victims must document the theft by December 31, 2025, to claim the theft-loss deduction on their 2025 tax return filed in 2026. Do not be ashamed and leave out certain amounts of loss from the scam.

Even if you are not ready to file your return, start compiling your evidence now. 

Waiting until tax season may make it difficult or impossible to establish when the theft was discovered or to obtain required reports in time.

If you were affected by a pig-butchering scam this year, taking action now can preserve your right to claim relief.

Seek Tax Relief From Pig-Butchering Scams 

Falling victim to a scam can be isolating and overwhelming, but the IRS’s updated position offers a chance for recovery.

Attorney Sammy Kim has guided clients through theft-loss claims, audits, and appeals, helping them demonstrate eligibility and secure relief.

Take the next step to protect yourself before time runs out. Contact The Law Offices of Sammy Kim to discuss your situation now.

Frequently Asked Questions About IRS Relief For Scam Victims

What is IRS Chief Counsel Advice 202511015?

It is an official IRS memorandum clarifying that losses from profit-motivated scams may qualify as theft losses under §165(c)(2). This option gives victims a pathway to seek relief when they can prove intent and documentation.

Can all crypto or romance scams qualify for theft-loss deductions?

Not necessarily. Eligibility depends on whether the investment was made with a genuine intent to earn profit and whether the loss resulted from theft rather than normal investment risk or volatility. Losses from romance or kidnapping scams are generally treated as personal casualty losses because they are not profit-motivated. Under §165(h)(5), personal casualty losses are not deductible, except in limited situations involving personal casualty gains or Federally declared disasters. For that reason, romance or kidnapping scams are generally not eligible for theft-loss deductions.

What documentation does the IRS require in proving I was a victim of a pig-butchering scam?

The IRS expects a clear paper trail, including law-enforcement reports, communication with your financial institutions and brokerage firms, communication records, financial transfers, and proof that the trading platform or wallet is now inaccessible.

Will filing a theft-loss deduction trigger an IRS audit?

It may, but that is often helpful. A review allows your representative to present evidence directly to the IRS and confirm that your case meets the criteria for relief.

Can I amend a prior tax return if a theft related to a tax scam happened before 2025?

Yes. If the loss occurred in an earlier year but was discovered later, you may be able to amend a prior return within the statute of limitations. An attorney can help determine the correct year, filing process, and the remaining statute of limitations.