What Is a Casualty Loss? Taxes From A to Z®
A casualty loss is a loss resulting from a sudden, unexpected, or unusual event—think hurricanes, fires, and similar events. For years, casualty losses were generally discussed alongside theft losses, and taxpayers could claim them as deductions, subject to limits. But the TCJA changed the rules, generally limiting personal casualty and theft loss deductions to losses connected with federally declared disasters. Beginning in 2026, Congress made that limitation permanent and added language confirming that certain losses connected with state-declared disasters may also qualify.
Those limitations hit scam victims particularly hard, including some who might have been entitled to a loss deduction before 2018. Now, an important exception under Section 165(c)(2) may allow a deduction if the theft arose from a transaction with a profit motive. In a 2025 memo, IRS Chief Counsel outlined several common scam scenarios and concluded that some victims may qualify—including taxpayers tricked into transferring money because they believed they were protecting an investment. The loss must qualify as theft under applicable law, there must be no reasonable prospect of recovery, and the transaction must have been entered into for profit. By contrast, victims of purely personal scams, such as romance or kidnapping scams, generally don’t meet that test.
And records matter. To claim a casualty or theft loss, you need to establish what you lost, your basis, the amount of any reimbursement, and other facts supporting the deduction. If those records were lost with your property—or you simply can’t find them—don’t assume you’re out of luck. As I explained, you can often reconstruct tax records using IRS transcripts, bank and credit card statements, third-party records, photographs, appraisals, and other evidence.
