Getting scammed is bad enough. Paying taxes on the money you already lost? That adds insult to injury.
Right now, that is exactly what happens to many fraud victims. A bipartisan bill moving through Congress could change that.
Imagine losing your retirement savings to a con artist. Then imagine getting a tax bill for pulling that money out early.
That is the reality under current law. If you are under age 59½ and cash out a retirement account because a scammer tricked you, you owe both income tax and a 10% penalty on the withdrawal. And you generally cannot deduct the stolen money unless the theft happened in a federally or state-declared disaster area.
"It's very punitive not being able to claim a theft loss deduction," said Matthew Roberts, a tax attorney at Meadows Collier in Dallas.
The rules have been this way since 2018, when tax-law changes first limited fraud-loss deductions to disasters. In 2025, President Donald Trump signed a bill that made that disaster-only rule permanent and expanded it to cover state-declared disasters too. But that still leaves out the vast majority of scams.
Clark Flynt-Barr, AARP's government affairs director for financial security, put it bluntly: "Victims have to be victims of the right type of scam."
Get the market news that matters in a five-minute read with Market Briefs, our free daily newsletter
The fraud problem is not small, and it is growing fast.
The biggest category? Investment scams, which accounted for $7.9 billion in losses last year. Imposter scams - where someone pretends to be a government official, a tech support person, or a family member in trouble - cost victims $3.5 billion, though only 20% of people who reported those scams actually lost money.
Older adults are hit especially hard. Among people 60 and older, losses of $100,000 or more totaled $1.6 billion in 2024. That is 68% of all money lost by that age group. Flynt-Barr said that is "generally because retirement accounts are being cashed out."
The legislation known as H.R. 9500, which aims to provide tax relief for fraud victims, cleared the House panel responsible for tax policy on July 1, 2026, by a 39-0 vote. It restores the ability for victims to deduct personal theft losses from their taxes, no matter what kind of scam they fell for.
"It reinstates the deduction to provide relief to victims of fraud so they can deduct the amount stolen from them, thereby mitigating the majority of the tax consequences," Flynt-Barr said.
The bill would also waive the 10% early-withdrawal penalty for retirement accounts drained by fraud. That matters a lot for older victims who may not have years of future income to make up the loss.
"Many taxpayers who are retired may not have taxable income in future years after the theft occurs, particularly where they lost their retirement funds," Roberts noted.
The catch: The bill still needs a vote by the full House of Representatives. There is no timeline yet for when - or if - that will happen.
You may not think about fraud until it happens to you, and that is the problem. These scams are targeting retirement accounts directly, and the tax code has been making a bad situation worse.
The proposed bill does not prevent fraud. But it would remove the extra punishment the tax system currently piles on top of the loss. For anyone with retirement savings, that is a meaningful protection - especially if you have aging parents or relatives who could be vulnerable.
If the bill passes, victims who lose money to fraud would at least not owe the government a cut of what they already lost. That is not a cure, but it is a fairer way to treat people who have already been through enough.
Join Market Briefs, our free daily newsletter, for a quick daily rundown of the markets
