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

On Behalf of the Law Offices of Sammy Kim

Updated October 6, 2026

For many scam victims, the financial loss is only the first wave.

The second wave shows up later, when tax time comes around, a retirement withdrawal creates unexpected income, or the IRS starts asking questions about a return that no longer fits what actually happened.

That is why this topic matters so much. A pig-butchering or fake-investment scam can leave someone dealing with both stolen money and a tax mess.

Quick Summary

• Recent IRS guidance created a possible path for some scam victims to claim theft-loss treatment in the right circumstances.
• Not every scam qualifies the same way, and not every loss is treated as a deductible investment loss.
• The facts matter, especially whether the transaction was profit-motivated and how well the victim can document what happened.
• The year the loss was discovered can matter just as much as the amount lost.
• If the IRS has already sent a notice, audit letter, or balance-due notice, the response strategy needs to fit both the scam facts and the tax procedure.

What Pig-Butchering and Similar Crypto Scams Usually Look Like

These scams often begin with trust-building.

Someone meets the victim through a dating app, social platform, text message, or supposed investment contact. Over time, the scammer pushes the victim toward a fake trading platform or fraudulent investment opportunity that appears to show profits on screen. Then the money disappears.

That description matters for tax purposes because these cases are often framed as investment activity, not just theft in the ordinary street-crime sense. The taxpayer may have moved money with the genuine expectation of making a profit, even though the entire platform was fake from the start.

Why the IRS Chief Counsel Guidance Matters

For years, many scam victims were effectively told that the tax law had little room for meaningful relief because the losses would be treated as personal.

That is why IRS Chief Counsel Advice 202511015 drew so much attention. It gave some taxpayers a way to argue that certain scam losses belonged in the category of profit-motivated theft losses rather than being dismissed automatically as personal losses.

That distinction is the center of the page.

If the taxpayer can show that the transaction was entered into for profit and the money was lost through theft or fraud, the analysis can look very different than it would for a purely personal scam.

At the same time, this guidance is not a blanket solution. It does not mean every scam loss becomes deductible. It means some victims may have a legal path they did not clearly have before.

Why Not Every Scam Gets Treated the Same Way

This is one of the most important points, and it is where thin summaries usually fail.

The IRS does not look at every scam through the same lens.

Some cases may support a profit-motive analysis, including fake investment platforms, crypto schemes, or other scams where the taxpayer was clearly trying to earn a return.

Other cases, including many romance or kidnapping-style scams, may not fit the same legal theory because the money was not transferred in pursuit of profit. That difference can control whether the taxpayer has a viable theft-loss argument at all.

So the first question is not just, “Was I scammed?”

The better questions are:

• what kind of scam was it?
• why was the money transferred?
• what records show the taxpayer’s intent?
• what year was the loss actually discovered?

Building a Case for a Theft-Loss Deduction the IRS Will Accept

These cases are evidence-driven.

The IRS is not likely to accept a theft-loss position just because the story is compelling. It will want a file that makes the case clearly and consistently.

That often includes:

• official reports, such as complaints to law enforcement or IC3
• communications showing how the scam developed
• bank records, wire confirmations, and transfer histories
• crypto wallet records or platform screenshots
• a timeline showing when the money was sent and when the fraud became clear

That last point matters more than many people realize. In loss cases, timing is not background detail. The discovery date may affect the year in which the loss position belongs.

If you are still sorting out the aftermath, it may also help to read pig-butchering scams and tax relief: what victims need to know before year-end and year-end checklist for victims of pig-butchering crypto scams.

Why Some Victims End Up Owing the IRS Anyway

The emotional logic of these cases is easy to understand.

If the money was stolen, people expect the tax problem to disappear with it.

But that is not always how the law works. A victim may have:

• withdrawn money from a 401(k) or IRA
• liquidated appreciated assets
• triggered taxable events while raising cash
• filed a return before the full nature of the fraud became clear

So even after losing the money, the person may still be staring at taxable income or an IRS balance. That is one reason these cases feel so cruel.

In some situations, the real issue becomes whether the taxpayer can support a theft-loss position strong enough to offset some of the damage. In others, the issue becomes collections because the liability remains but the cash is gone.

If that sounds familiar, you may also want to review options for crypto tax debt and owe the IRS after a scam: what you can do.

When an IRS Audit Related to a Tax Scam Might Work in Your Favor

Most people hear the word audit and assume everything just got worse.

In scam-loss cases, an audit is not always bad. In some circumstances, it creates a formal opportunity to present the full factual story, organize the evidence, and demonstrate why the taxpayer’s position fits the IRS guidance.

That does not make audits easy. It does mean they can be a venue for building the case instead of merely fearing it.

The key is whether the taxpayer is prepared to explain:

• the structure of the scam
• the reason the transfers were made
• the proof that a theft actually occurred
• the timing of discovery
• the relationship between the loss and the return position being claimed

If the issue has already reached the notice stage, it may help to review sample IRS audit letters you might receive and how to respond and what to do if you receive an IRS audit letter before responding.

Why These Cases Often Need More Than Tax Prep

A scam-loss case is not just about putting numbers on a return.

It may involve:

• legal characterization of the loss
• amended returns
• proof standards
• audit strategy
• appeals or collection planning
• protecting the taxpayer from making broad statements that undermine the position later

That is why these matters often fall into tax controversy work, not just return preparation.

Do Not Miss the Timing Window for Documentation

Scam victims sometimes wait because they are overwhelmed, embarrassed, or still trying to believe what happened.

That is understandable, but delay can weaken the record.

Even if the return itself will not be filed until later, it often helps to start building the evidentiary file right away:

• save account statements
• preserve screenshots
• report the scam
• organize communications
• create a clean timeline of when the fraud became clear

The longer that process waits, the harder it can be to prove the details in a way the IRS will trust.

Why an Experienced IRS Tax Attorney Matters Here

These cases are emotionally charged and legally technical at the same time.

That combination is exactly why a victim may need help. The tax question is not only whether something bad happened. The question is how to present what happened in a form the IRS recognizes under the law.

Sammy Kim works with taxpayers facing serious IRS pressure, including situations where the emotional truth is obvious but the tax treatment is not. That can matter a great deal in scam-loss cases, where one weak filing position or one rushed response can carry into the return, the audit, and the collections stage.

Talk to a tax expert now. Book a consultation at vataxattorney.com or call (703) 202-1005.