IRS Section 165 – Relief for Scam Victims
Congress is actively moving a bipartisan solution to fix this exact issue. On September 16, 2026, the U.S. House of Representatives overwhelmingly passed H.R. 9500: The Tax Relief for Fraud Victims Act by a 408-17 vote.
What H.R. 9500 Changes for Victims (Crypto & Wire Fraud)
If enacted into law by the Senate, this bill would retroactively repair the financial devastation faced by victims who got hit with surprise IRS bills:
- Repeals the TCJA Limitation: It completely strikes the restrictions that limited theft deductions to federally declared disasters. It explicitly restores tax relief for fraud-related losses, whether the funds were sent via crypto or a bank wire.
- Waives Retirement Penalties: Many of the “large tax liabilities” likely came from victims liquidating their 401(k)s or IRAs under the influence of scammers. Under current law, they are hit with ordinary income tax plus a 10% early withdrawal penalty. H.R. 9500 waives that 10% penalty entirely if the withdrawal was forced by fraud or deceit.
- Retroactive Relief: Crucially, the bill allows victims to claim these fraud-related deductions retroactively for losses sustained since January 1, 2021.
- Flexible Filing Year: It gives taxpayers the election to treat the loss as sustained either in the year it occurred or the year they discovered it, simplifying the “reasonable prospect of recovery” timeline.
How Forensic Tracing Supports a Section 165 Claim
- The Cost Basis: Tracing the fiat-to-crypto on-ramps to prove the exact out-of-pocket investment.
- The “No Prospect of Recovery” Mandate: Proving that the funds have left legal jurisdictions, passed through mixers, or landed in uncooperative offshore exchanges, legally locking in the discovery of the loss.