Federal tax law permits taxpayers to deduct so-called “theft losses,” provided certain requirements are met.  Initially, a taxpayer must show that he or she will not receive compensation through insurance or another third party for the loss.  If this threshold is met, the taxpayer must overcome additional hurdles, including showing:  (1) the occurrence of a theft; (2) the amount of the theft; and (3) the date the taxpayer discovered the theft.  As discussed more fully below, these requirements are not always so easy to meet.

The Occurrence of a Theft

Commonsensically, a taxpayer must first show the existence or occurrence of a theft to sustain a theft loss deduction under Section 165 of the Code.  For these purposes, theft is “deemed to include, but shall not necessarily be limited to, larceny, embezzlement, and robbery.”  Treas. Reg. § 1.165-8(d); see also Littlejohn v. Comm’r, T.C. Memo. 2020-42 (“As used in section 165, the term ‘theft’ is a word of general and broad connotation, intended to cover any criminal appropriation of another’s property, including theft by larceny, embezzlement, obtaining money by false pretenses, and any other form of guile.”).  Moreover, according to the IRS and a majority of the federal courts:

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