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Key Takeaway
Victims of pig butchering scams can claim tax deductions under IRC §165(c)(2), potentially recovering $22,000-$37,000 on a $100,000 loss. Most tax professionals don’t know this.
The rise of cryptocurrency has unfortunately brought a surge in sophisticated fraud schemes, with “pig butchering” scams becoming alarmingly prevalent. Our team at Blockchain Crypto Tax Prep has witnessed a dramatic increase in victims seeking help after losing substantial sums to these elaborate cons.
Here’s what many tax advisors get wrong: they assume the 2017 Tax Cuts and Jobs Act eliminated all theft loss deductions. That’s not entirely accurate. There’s a crucial tax provision that could help victims recover significant financial losses.
The Anatomy of a Pig Butchering Scam
These scams earn their disturbing name from the methodical way fraudsters “fatten up” victims before the final strike.
1
The Unexpected Connection
It starts innocently—a mistaken text, social media DM, or dating app match.
→ “Wrong number” messages turning into conversations
→ Rapid intimacy with romantic undertones
→ Immediate connection despite being strangers
→ Professional LinkedIn profiles
2
Building Trust
Professional scammers invest weeks or months cultivating the relationship.
→ Daily conversations about life and work
→ Video calls using deepfakes
→ Emotional manipulation
→ Gradual investment talk
3
The “Exclusive” Opportunity
Once trust is established, they introduce their investment “opportunity.”
→ Claims of insider trading knowledge
→ Complex crypto explanations
→ “Overseas exchanges”
→ Direct signup links to fake platforms
⚠️ WARNING: Your first deposit is your first loss
4
Manufacturing Success
The fake platform shows fabricated profits to build confidence.
→ Small “profits” appear
→ Small withdrawals allowed (trust-building)
→ Impressive fake dashboard gains
→ Encouragement for larger deposits
5
The Jackpot Illusion
Your account appears to explode with massive returns.
→ 10x-100x returns overnight
→ Excitement overwhelms caution
→ You attempt to withdraw
→ The trap springs shut
6
The Final Theft: “Tax Payment” Scam
“Congratulations! Before we release your funds, you must prepay capital gains taxes…”
They demand payment for:
→ 20-30% in “capital gains taxes”
→ “Platform fees”
→ “Account verification deposits”
→ “Insurance bonds”
🛑 CRITICAL: Legitimate exchanges NEVER require pre-payment of taxes 🛑
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Been Targeted? Take Immediate Action
✓ DO THIS NOW
• STOP all payments
• SECURE your assets
• DOCUMENT everything
• FILE IC3 & police reports
• GET professional help
✗ DON’T DO THIS
• Send “one more payment”
• Trust “recovery services”
• Feel ashamed
• Try to “win it back”
• Wait and hope
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The Tax Relief You Deserve
IRC §165(c)(2) Theft Loss Deductions
Here’s the good news most tax professionals miss: You can likely deduct your losses.
How IRC §165(c)(2) Works
This tax code provision allows deductions for losses that meet two simple criteria:
1
Profit Motive
Loss occurred in a transaction you entered intending to generate profit
2
Non-Business
Loss isn’t connected to a formal trade or business activity
Pig butchering victims qualify because you genuinely believed you were making legitimate investments. The scammer’s fraud doesn’t negate your profit motive—it confirms it.
Why You Can Still Deduct (Despite Tax Reform)
IRC §165(c)(2) theft losses are EXPLICITLY EXEMPTED under Section 67(b)(3)
“For tax years 2018 through 2025, individual taxpayers with theft losses are allowed a deduction if the loss is due to theft related to a transaction entered into for profit.”
— IRS Topic No. 515
📌 Recent IRS Guidance (March 14, 2025)
Chief Counsel Memorandum 202511015 provides additional clarity supporting theft loss deductibility for investment scams, including cryptocurrency fraud.
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Real Financial Impact Example
You lost $100,000 to a pig butchering scam
Without Deduction
$100K
Total loss, zero relief
With IRC §165(c)(2)
$22K-$37K
Tax savings recovered
+ Additional Benefit:
If you reported $50,000 in fake “gains” and paid $12,000 in taxes on phantom income, you can amend that return for a refund.
TOTAL RECOVERY: $34,000-$49,000
📋 How to Claim Your Deduction
Required Form: IRS Form 4684, Section B
Essential Documentation:
✓ Bank statements
✓ Blockchain records
✓ Conversation screenshots
✓ Platform statements
✓ Withdrawal denials
✓ Police/IC3 reports
Frequently Asked Questions
Can I deduct the “tax payment” I sent?
Yes. Any funds sent to the scammer—deposits, investments, and fake “tax payments”—are part of your deductible theft loss.
What if I withdrew small amounts early on?
Those reduce your net loss. Your deduction equals total sent minus total successfully withdrawn.
Do I need a police report?
While not required, a police report or IC3 filing significantly strengthens your documentation. Highly recommended.
Can I amend previous returns?
Yes. You have three years to file Form 1040-X to remove phantom income and claim refunds.
What if I sent crypto instead of cash?
The deductible amount is the fair market value of the cryptocurrency when you sent it to the scammer.
Don’t Let Scammers Steal Your Money AND Your Tax Relief
Get expert help claiming your IRC §165(c)(2) deduction
About Blockchain Crypto Tax Prep
Maryland’s leading cryptocurrency tax preparation firm, specializing in digital asset taxation for traders, investors, DeFi participants, and victims of crypto-related financial crimes.
Our Specialized Services:
✓ Theft Loss Documentation
⚖️ Important Disclaimer
This article provides general educational information about IRC §165(c)(2) theft loss deductions and does not constitute legal, tax, or financial advice. Tax laws are complex and individual circumstances vary. Always consult with qualified tax professionals regarding your specific situation.
