Gamblers Can Tax Deduct Their Losses. Why Can’t Scam Victims?

Taxes on gambling losses

For the sake of comparison, it’s interesting to look at how the IRS handles gambling losses. People who lose money while gambling can deduct all of their losses against taxes on their winnings (although not to exceed their winnings). But a new provision in the July bill means that, starting on Jan. 1, 2026, they will only be able to deduct 90 percent of those losses on their federal taxes.

The powerful gambling industry is displeased: The 10 percent hit “creates an unfair precedent by taxing phantom income and uniquely penalizing a legal, heavily regulated activity,” Bill Miller, president and CEO of the American Gaming Association, said in comments to the House Committee on Ways and Means on July 25.

Rep. Dina Titus, D-Nev., along with Rep. Ro Khanna, D-Calif., introduced a bill – the FAIR Bet Act — to make all gambling losses deductible once again.

Sen. Catherine Cortez Masto, D-Nev., who tried but failed to get a similar bill passed in the Senate, said in a statement that the new gambling legislation “is actually causing people to pay taxes on money they lost. It makes no sense.”

Why the law changed for scam victims, and its impact

So why was the deduction for money stolen through scams removed? “No one really knows,” says Anderle. “Usually, you get committee explanations about particular positions. There wasn’t one here. It was a rushed process. There was no official reasoning behind why victims of theft should have their taxes so dramatically increased.”

Meanwhile, the law will likely affect an ever-growing number of people as scams increase in sophistication and frequency.

A record $16.6 billion was reported stolen through scams and fraud last year, up 33 percent from $12 billion in 2023, according to the FBI. The actual losses are likely higher than the official numbers indicate, since many victims don’t report their losses or seek tax assistance, says Anderle. (In fact, the Federal Trade Commission submitted a report to Congress in 2024 indicating that, when accounting for underreporting, as much as $158.3 billion was stolen from Americans in 2023 alone.) “A lot of victims do not come forward or talk to organizations like ours because they’re too embarrassed,” Anderle says. “Many of them have already lost their life savings, and now they have a tax bill that would require them to sell their house to pay it or use the remainder of their savings. It’s devastating.”

An April 2024 report, “Scammed then Taxed,” from the U.S. Senate Special Committee on Aging, noted other repercussions of requiring victims to declare scam losses as income: It “may impact Medicare costs and eligibility for public benefits, such as Medicaid, subsidized housing, and Supplemental Nutrition Assistance Program (SNAP) benefits.” Some scam victims who withdrew retirement funds were forced to pay up to $419 more per month for their Medicare Part B premiums, according to the Senate committee.

The Ponzi scheme exception was passed in 2009, following the fallout from Bernie Madoff’s notorious $50 billion investment fraud scheme. (Ponzi schemes involve paying off old investors with money from new investors to give the illusion that the initial investments were profitable.) Anderle notes that the current rule essentially “gives investors every possible opportunity to limit their taxes, but requires victims of crime and catastrophe to pay.”

Legislative solutions

In May, AARP wrote to a group of U.S. lawmakers to support the bipartisan, bicameral Tax Relief for Victims of Crimes, Scams and Disasters Act (H.R. 3469, S. 1773). The legislation would not only have reinstated the deduction for money lost to non-Ponzi scams, but it would also have allowed people who paid taxes on theft losses between 2018 and 2025 to claim the deduction retroactively. This legislation was ultimately not included in July’s One Big Beautiful Bill Act, nor was a similar amendment to the OBBBA (S. Amdt 2528) filed by Sen. Chuck Grassley, R-Iowa. The amendment would have allowed victims who had funds stolen from their retirement accounts to leverage the existing Ponzi scheme deduction and deduct those losses. It would also have permitted victims under the age of 59½ to not pay early withdrawal penalties in cases where their retirement funds had been withdrawn due to fraud.

There have been discussions in Congress about a second reconciliation package that would focus on bipartisan tax bills not included in the bill passed in July. Clark Flynt-Barr, AARP’s government affairs director for financial security, noted, “There’s been growing support for addressing this issue, with 20 bipartisan cosponsors supporting a House bill to reinstate the theft loss deduction. There will hopefully be another opportunity here.”

Ways to fight back

If you’ve been scammed and you’re facing a large tax bill, your options are limited. Here are some steps to take.

Know the exceptions. Victims of Ponzi schemes are still allowed to use the deduction, says Flynt-Barr. You can also claim the deduction if you were scammed while conducting business. “If it’s clear from the record that this transaction where you lost money was motivated by business or financial interests, then you actually are allowed the deduction,” Anderle says. “It’s all about intent. If you were trying to get a service for your business, or you were trying to enter into a legitimate financial contract, and that was your sole, primary motivation, then that loss will be allowed.”

The business exception is not a slam dunk, however. The exceptions are “highly technical and may be difficult to decipher, even for tax professionals, let alone most taxpayers,” the Senate report notes.

File an offer in compromise (OIC). An OIC is an IRS relief option that lets you settle your tax debt for less than the full amount. Scam victims experiencing financial hardship can use this to reduce their tax liabilities; however, the process is complicated and time-consuming, with a low success rate. Legal Action of Wisconsin, for example, had a case where an octogenarian couple lost $1 million in a scam. The IRS did not accept their OIC. Instead, it told them to sell their home, one of their few remaining assets. “We often end up having to appeal,” says Anderle.

Seek legal assistance. Most people are hesitant to take on the IRS on their own, with good reason. It’s like a novice David battling a bureaucratic Goliath — and the OIC program is “complex, burdensome, and harsh,” according to the Senate committee report, with “stringent qualification requirements.”

Even attorneys can find it challenging. The process typically involves submitting 50 to 100 pages of documents, Nathaniel Puffer, director of the New Mexico Legal Aid Low Income Taxpayer Clinic, told the Senate committee. If you can’t afford a lawyer, look for a low-income law clinic in your area. The IRS has instructions for the OIC process on its website.

Write to lawmakers. If you want the theft deduction restored, share your thoughts with your U.S. senator or representative in the House. “Members of Congress care a lot about what their constituents think,” says Flynt-Barr. “When I worked on the Hill, that was the first question we’d get if we were considering sponsoring a bill: Have we heard about this from our constituents?”

She notes that informing lawmakers will increase the likelihood that the theft deduction will be included in a future tax bill. The deduction is a niche topic when it comes to tax issues, so many lawmakers may be ignorant of the problem, she adds. “They may not know if you don’t tell them.”