This is exactly right. Business losses from scams are still deductible as business expenses if they occurred in the normal course of business. It's only personal theft losses that got eliminated (except for federally declared disasters). OP, was this investment somehow connected to any business activities or was it purely personal? That makes a huge difference in deductibility.

You can also try contacting CFPB (Consumer Financial Protection Bureau) if a bank or financial institution was involved in any way with the transactions. They sometimes can put pressure on financial institutions that may have facilitated the scam.

Thanks for the suggestion! I did file a report with IC3 already but haven't heard anything back yet. It's been about 3 months since I filed the report. I'll check out the CFPB option too. My bank wasn't much help since I authorized the transfers myself (stupid, I know), but maybe CFPB could still do something.

That's a great point! He definitely had some expenses - mostly software subscriptions and a new laptop he had to buy specifically for this job. I wasn't sure if we could deduct the full cost of the laptop or if we needed to depreciate it.

For the laptop, it depends on when he purchased it and how much it cost. If it was under $2,500, you can potentially use Section 179 to deduct the full cost in one year, assuming it was used more than 50% for business. For the software subscriptions, those are generally fully deductible as business expenses in the year paid. Just make sure you keep receipts for everything. You might also want to look into home office deduction if he was working from home - you can either use the simplified method ($5 per square foot up to 300 square feet) or the regular method which calculates the actual expenses.

Is there any way to reduce the self-employment tax hit? That 15.3% is brutal when you're already paying regular income tax too.

Thanks for this! Did you have to specifically ask your attorney to break it down this way? My lawyer seems focused only on getting the highest dollar amount and doesn't seem to understand or care about the tax implications.

Yes, I had to specifically ask - actually, I had to insist on it. Most attorneys are focused solely on the gross settlement amount rather than your net after taxes. I ended up printing out IRS Publication 4345 "Settlements — Taxability" and bringing it to my attorney to show him exactly what I needed. Even if your attorney isn't knowledgeable about tax implications, you can request that the settlement agreement specifically allocate amounts to different categories. For example, you want as much as possible categorized as "compensation for diminution in property value due to undisclosed defects" rather than "damages for fraud." The former is more likely to be treated as a reduction to basis while the latter might be considered ordinary income. Don't be afraid to push back - this is your money and your tax situation!

You're right that the Tax Cuts and Jobs Act severely limited casualty loss deductions for tax years 2018-2025. For non-business casualties, they're only deductible if they result from a federally declared disaster. This is why structuring the settlement properly is so important. What you can't claim as a casualty loss might still be handled favorably if properly categorized as a recovery of capital or reduction in basis. However, fraud victims specifically have had a tough time under current tax law since the casualty loss limitations went into effect.

Does having a separate bank account matter for proving it's a business? I just use my personal checking for everything.

Having a separate bank account isn't required but it's extremely helpful for proving business intent. It shows you're treating the activity professionally and makes tracking income and expenses much easier. It's one of the factors the IRS considers when determining if something is a business vs. hobby. Other factors include business cards, a business name, proper recordkeeping, and marketing efforts. The more business-like behaviors you demonstrate, the stronger your case for self-employment treatment.

Wait I've never done quarterly payments! I've been self-employed for 2 years and always just paid at tax time. How much trouble am I in?

That's an interesting thought! Maybe there was just a communication breakdown. I was so focused on my 401k contributions that I might have misunderstood if she was asking about separate IRA contributions. Is it worth going back to TurboTax and clarifying this with a different expert?

Absolutely worth clarifying with a different TurboTax expert. Ask specifically about the deductibility of traditional IRA contributions when you already participate in a 401k plan. The rules get complicated based on your income level and filing status. For context, if you're single and covered by a workplace retirement plan, your ability to deduct traditional IRA contributions starts phasing out at an income of $77,000 and disappears completely at $87,000 (for 2024). The ranges are different if you're married or if only one spouse has a workplace plan. But regardless, 401k and IRA contributions are always reported separately - they're never the same thing.

What about a SIMPLE IRA? Those are employer-sponsored but have "IRA" in the name. Could that be what the TurboTax person was confusing?