Theft losses

What Is Theft Losses?

Theft losses refer to the reduction in value of property due to an illegal taking, such as robbery, larceny, embezzlement, or fraud. These losses primarily fall under the domain of Taxation and Personal Finance, as they often have implications for an individual's or business's Taxable Income and overall Net Worth. While the immediate impact of theft is the direct loss of assets, the term "theft losses" frequently relates to their treatment for tax purposes or for Insurance Claim considerations.

History and Origin

The concept of accounting for theft losses has evolved alongside tax laws and legal systems that recognize property rights and define criminal acts. Historically, individuals and businesses have sought to recover or mitigate losses incurred from illegal activities. The Internal Revenue Service (IRS) in the United States, for instance, has long provided guidelines for deducting such losses, often alongside Casualty Losses. These guidelines are detailed in publications like IRS Publication 547.⁴⁴,⁴³

The systematic tracking of theft, broadly categorized under "property crime," provides insight into the prevalence and financial impact of such events. The Federal Bureau of Investigation (FBI) has collected data on property crimes, including larceny-theft, burglary, and motor vehicle theft, through its Uniform Crime Reporting (UCR) Program for decades.⁴²,⁴¹ These statistics help illustrate the historical context and scale of theft in society. For example, property crime rates in the U.S. have shown a general decline in recent years, with an 8.1% decrease nationally in 2024 compared to 2023, encompassing decreases in burglary, larceny-theft, and motor vehicle theft.⁴⁰

Key Takeaways

Theft losses pertain to the financial impact of property illegally taken, including through larceny, embezzlement, or fraud.
For individuals, the deductibility of personal-use theft losses on federal tax returns was significantly restricted by the Tax Cuts and Jobs Act (TCJA) of 2017, generally limiting deductions to federally declared disaster areas for tax years 2018 through 2025.³⁹,³⁸
Theft losses on business property or property held for income-producing activity may still be deductible.
Calculating a theft loss for tax purposes involves determining the property's Fair Market Value before the theft and its Basis, reduced by any reimbursements.
Reporting theft losses accurately often requires detailed documentation and understanding of specific tax rules, which can be found in IRS publications.

Formula and Calculation

When applicable, calculating the deductible amount for theft losses involves several steps, especially for tax purposes. For Business Property or income-producing property, the loss amount is generally the lesser of:

The decrease in Fair Market Value of the property resulting from the theft.
The adjusted basis of the property.

This amount is then reduced by any Insurance Claim or other reimbursement received or expected.

For personal-use property, prior to the Tax Cuts and Jobs Act (TCJA) of 2017, the deductible amount for a theft loss was subject to a two-part limitation: a $100 per-casualty floor and a 10% of Adjusted Gross Income (AGI) floor. The formula for pre-TCJA personal theft losses (or for personal casualty losses in federally declared disaster areas post-TCJA) can be expressed as:

\text{Deductible Loss} = \text{Max}(0, (\text{Lesser of FMV decrease or Adjusted Basis}) - \text{Reimbursements} - \$100 - (0.10 \times \text{AGI}))

Where:

FMV decrease: The reduction in the property's fair market value due to the theft.
Adjusted Basis: The original cost of the property plus improvements, minus depreciation, etc.
Reimbursements: Any money or other compensation received or expected from insurance or other sources.
$100 Floor: A statutory reduction per theft event.
10% AGI Floor: A reduction based on 10% of the taxpayer's Adjusted Gross Income.

It is crucial to note that for tax years 2018 through 2025, individual taxpayers can generally only deduct personal theft losses if they occurred in a federally declared disaster area.³⁷,³⁶,³⁵ Theft losses not in a federally declared disaster area are typically not deductible for personal-use property during this period.³⁴,³³

Interpreting Theft Losses

The interpretation of theft losses largely depends on the context—whether for insurance purposes, financial reporting, or tax implications. From a Financial Planning perspective, understanding potential theft losses is a key component of Risk Management. It underscores the importance of adequate Property Insurance and security measures.

For tax purposes, the interpretation centers on deductibility. Before 2018, individuals could deduct personal theft losses as Itemized Deductions subject to specific limitations. However, under current law, personal theft losses are generally not deductible unless they are related to a federally declared disaster., ³²T³¹his significant change impacts how individuals report and account for such losses on their tax returns. For businesses, theft losses are still generally deductible as ordinary business expenses, reflecting the cost of doing business. The key distinction often lies in whether the stolen property was for personal use or for a business or income-producing activity.

Hypothetical Example

Consider an individual, Sarah, who owns a valuable collection of rare coins, a type of Personal Property. In 2024, her coin collection, which she purchased for $20,000 (her basis), is stolen from her home. The fair market value of the collection immediately before the theft was $25,000. Sarah has homeowner's insurance that covers theft, and after filing an Insurance Claim, she receives a reimbursement of $18,000. Her adjusted gross income (AGI) for the year is $70,000.

Under the current tax laws (for tax years 2018 through 2025), if this theft did not occur in a federally declared disaster area, Sarah generally cannot deduct any portion of her personal theft loss on her federal income tax return. T³⁰he TCJA eliminated the deduction for most personal theft losses.

However, if the theft had occurred in a federally declared disaster area (or if the old rules applied), the calculation would be as follows:

Determine the loss amount: The lesser of the decrease in FMV ($25,000) or her adjusted basis ($20,000) is $20,000.
Subtract reimbursements: $20,000 (loss amount) - $18,000 (reimbursement) = $2,000.
Apply $100 per-event floor: $2,000 - $100 = $1,900.
Apply 10% AGI floor: 10% of Sarah's AGI ($70,000) is $7,000.
Calculate deductible amount: Since her remaining loss ($1,900) is less than 10% of her AGI ($7,000), no deduction would be available even under the old rules or in a declared disaster area (assuming regular rules, not special disaster relief provisions that sometimes modify the AGI floor).

This example illustrates the significant impact of the TCJA on the deductibility of personal theft losses.

Practical Applications

The concept of theft losses is crucial across various financial domains:

Tax Compliance: Individuals and businesses must understand the specific rules for deducting theft losses on their tax returns. For personal-use property, this often means checking if the loss occurred in a federally declared disaster area to qualify for a deduction., ²⁹B²⁸usinesses, however, can generally deduct theft losses related to their operations. The IRS provides detailed guidance on this in IRS Publication 547.
*²⁷ Insurance Underwriting and Claims: Property Insurance policies often include coverage for theft. Understanding theft losses helps insurers assess risk and process claims, while policyholders must accurately document their losses for successful Insurance Claim payouts.
Investment Security: In the realm of investments, protecting against theft losses, such as through fraud or unauthorized trading, is a major concern. Regulatory bodies like the Financial Industry Regulatory Authority (FINRA) emphasize investor protection and provide resources to help individuals safeguard their assets against fraudulent schemes., ²⁶F²⁵INRA's oversight includes preventing fraudulent activities and promoting transparency to help investors make informed decisions.
*²⁴ Forensic Accounting: In cases of significant theft or fraud, forensic accountants are often employed to quantify losses, trace stolen assets, and prepare documentation for legal and insurance purposes. Their work is vital in accurately assessing the financial impact of theft.
Risk Management & Security: Both individuals and corporations implement security measures to prevent theft losses. This includes physical security, cybersecurity, and internal controls to protect assets.

Limitations and Criticisms

Despite their significance, the treatment and impact of theft losses have several limitations and criticisms:

Deductibility Restrictions (Personal Property): A primary criticism for individuals stems from the Tax Cuts and Jobs Act (TCJA) of 2017. For tax years 2018 through 2025, personal theft losses are generally not deductible unless they result from a federally declared disaster., ²³T²²his change significantly limits the tax relief available to victims of non-disaster-related thefts, leading to concerns that scam victims face tax burdens on stolen amounts., ²¹T²⁰his contrasts with prior law where personal theft losses were broadly deductible, albeit subject to AGI limitations.
*¹⁹ Proof of Loss: Proving a theft loss can be challenging. Taxpayers generally need to show that the property was actually stolen, not just lost or misplaced, and that there's no reasonable prospect of recovery., T¹⁸his often requires police reports, insurance claims, and other verifiable documentation.
Valuation Difficulties: Accurately valuing stolen property, especially unique or sentimental items, can be subjective. Determining the Fair Market Value immediately before the theft and the property's Basis can be complex.
Insurance Reimbursement: The deduction is only for losses not compensated by insurance or other means. If an Insurance Claim covers the loss, there is no deductible theft loss for tax purposes.,
¹⁷*¹⁶ Pervasiveness of Fraud: Beyond direct theft of physical property, financial theft often occurs through fraud, impacting millions. The Federal Trade Commission (FTC) collects millions of consumer reports annually on fraud and identity theft, highlighting the widespread nature of these financial losses, many of which may not qualify for tax deductions under current rules.,,¹⁵
¹⁴
¹³## Theft Losses vs. Casualty Losses

While often discussed together due to similar tax treatment, Theft Losses and Casualty Losses refer to distinct events.

Theft Losses occur when property is illegally taken. This includes criminal acts like larceny, robbery, embezzlement, and fraud. The defining characteristic is the deliberate, unlawful appropriation of property by another party.
Casualty Losses result from the damage, destruction, or loss of property due to a sudden, unexpected, or unusual event. Common examples include natural disasters like floods, fires, hurricanes, or tornadoes, as well as events like car accidents., ¹²T¹¹hey are typically not caused by a deliberate illegal act directed at the property by another person.

Before the Tax Cuts and Jobs Act (TCJA) of 2017, both types of losses to Personal Property were generally deductible as Itemized Deductions, subject to $100 and 10% of Adjusted Gross Income limitations., ¹⁰H⁹owever, for tax years 2018 through 2025, personal casualty and theft losses are only deductible if they occur in a federally declared disaster area. This means that for individuals, non-disaster related theft losses are generally not deductible, while non-disaster related casualty losses are also not deductible., ⁸F⁷or Business Property, both casualty and theft losses remain generally deductible.

FAQs

Q1: Can I deduct theft losses on my taxes?

For individuals, the ability to deduct personal theft losses on federal income taxes is severely limited for tax years 2018 through 2025. You can generally only deduct a personal theft loss if it occurred in a federally declared disaster area. Theft losses related to a business or income-producing activity are still generally deductible. Always consult IRS publications or a tax professional for specific guidance on your situation.,
⁶
⁵### Q2: What kind of documentation do I need to claim a theft loss?

To claim a theft loss, you generally need evidence that the property was stolen. This typically includes a police report documenting the theft. You also need to show proof of ownership and the Basis of the property, as well as its Fair Market Value immediately before the theft. Records of any insurance reimbursement should also be kept.

⁴### Q3: Does my insurance cover theft losses?

Most Property Insurance policies, such as homeowner's or renter's insurance, include coverage for theft of personal property, subject to policy limits and deductibles. Business insurance policies also typically cover theft of business assets. The amount you receive from an Insurance Claim will reduce any potential deductible loss.

Q4: How is fraud treated compared to a physical theft for tax purposes?

For tax purposes, losses due to fraud (like embezzlement or scams) are generally treated as theft losses. However, similar to physical theft, their deductibility for individuals for tax years 2018-2025 is typically limited unless the loss occurred in a federally declared disaster area or if the funds were lost in a transaction entered into for profit. Recent IRS guidance has offered some clarification on what constitutes a "profit-driven transaction" for deduction eligibility in fraud cases.

³### Q5: What is the $100 and 10% AGI rule for theft losses?

Prior to the TCJA (and still applicable to personal casualty losses in federally declared disaster areas), a personal theft loss was deductible only to the extent that each individual loss exceeded $100. Furthermore, the total of all such losses for the year had to exceed 10% of your Adjusted Gross Income. If your total qualifying losses were less than 10% of your AGI, you could not claim a deduction.,[²¹](https://www.atcincometax.com/casualty-and-theft-losses/)