Losing money in a crypto scam is emotionally and financially devastating. After a pig butchering crypto scam, you may ask: Can you recover losses through your tax return? 

At Powell Tax Law, we guide crypto investors, business owners, and individual taxpayers through IRS rules on digital asset losses. This post highlights when scam victims may qualify for a tax deduction and key steps before filing.

What Exactly Is a “Pig Butchering” Crypto Scam?

A pig butchering scam is a type of investment fraud. Victims are often lured via social media or dating apps through fake relationships or friendly trust-building. Then, they are persuaded to invest increasing amounts, usually cryptocurrency, into fraudulent platforms promising big returns. Once scammers have enough funds, they “slaughter” the pig: the entire investment is stolen. 

For many victims, this leaves them not only with financial losses but also uncertainty about their tax obligations or relief.

Why Some Crypto Scam Losses Can Be Tax-Deductible

Under U.S. tax law, losses from theft may be deductible, but only under specific conditions. A theft loss occurs when money or property is illegally taken with criminal intent, and the deductible amount is generally the owner’s adjusted basis since the property is considered worthless after the theft. For tax years 2018–2025, individuals may claim a deduction for theft losses if the loss arose from a profit-motivated transaction. Special rules may also apply for victims of Ponzi-type investment schemes, which are outlined in Form 4684 instructions and IRS resources.

That’s where pig butchering scams can, in some cases, qualify. Because victims entered the transaction with the intent to invest and earn profit, they believed they were buying into what they thought was a legitimate crypto investment; the loss may be deductible as a theft loss. 

In a recent 2025 memo, the Internal Revenue Service (IRS) Office of Chief Counsel recognized that certain scam victims may claim theft-loss deductions when the stolen funds resulted from fraud, and there was no reasonable prospect of recovery.

Did you know? According to the IRS’s recent guidance, victims of scams who thought they were investing for profit, such as in crypto, may deduct the loss in the year they discover the theft, so long as the loss is final and not likely to be recovered.

What the Recent IRS Memo Means for Scam Victims

In March 2025, the IRS released a key memorandum (CCA 202511015) that sheds new light on the deductibility of scam losses. The memo examined several hypothetical scam-victim scenarios, including those involving crypto-investment fraud, and concluded that:

• If a taxpayer transferred funds to what they believed was an investment, and the loss was due to theft or fraud with little prospect of recovery, the loss could qualify as a deduction under Internal Revenue Code § 165.
• The loss is deductible in the year it is discovered, not necessarily the year you first sent the money, which matters because many people realize they were scammed months or years later. IRS Publication. 547 and IRS Topic No. 515 explains this deeper. 
• To qualify, you must show there is “no reasonable prospect of recovery” (for example, after law-enforcement investigation or exchange notification).

The recent IRS stance represents a tangible opening for crypto investors who lost everything to a scam. Still, these claims are highly fact-sensitive, the circumstances matter.

What You Should Do: Practical Steps Before Filing

If you believe you may qualify for a theft-loss deduction after a pig butchering scam, here’s what to do:

1. Document everything: Keep all records of transactions, bank or crypto-exchange statements, transfer receipts, screenshots, emails, chat logs, anything that shows what happened and when.
2. Report the fraud: File a report with law enforcement or a relevant agency (e.g., FBI/IC3) or notify the exchange/financial institution. This helps establish that recovery is unlikely. The IRS memo assumes victims take “reasonable action” after discovering the fraud.
3. Determine the deduction year: Claim the loss in the year you discovered the scam, not when you originally sent funds. That could be a different tax year.
4. Calculate your loss basis: The deductible amount is generally your adjusted basis, what you put in, not any subsequent “value” or anticipated gains.
5. File the right form with explanation: Typically, you must use Form 4684 (Casualties and Thefts). If needed, include a disclosure to explain the nature of the scam and why you’re claiming the loss. Some tax professionals recommend attaching a statement to clearly articulate the crime and lack of recovery.
6. Consult a qualified tax or legal professional: Because eligibility depends heavily on the facts, your intent, state law, documentation, and recovery chances, experienced help can make the difference.

Ready to file? Find Relief After a Crypto Scam

If you lost money in a pig butchering crypto scam, there may be tax relief available. Under recent IRS guidance, theft losses from scams tied to profit-motivated investments can qualify for a deduction under § 165 if the loss is final, unrecovered, and well-documented.

At Powell Tax Law, we understand the stress and complexity that come with crypto fraud. If you are facing these circumstances, we can help you evaluate whether your loss qualifies, gather the right documentation, and guide you through filing. 

Contact us today to see if you qualify. Let’s take the first step toward recovering what you lost.