8712 / When is a taxpayer entitled to take a deduction for a theft loss?
Editor’s Note: Under the 2017 tax reform legislation, individuals are no longer entitled to deduct casualty and theft loss expenses as itemized deductions for 2018-2025 (when those losses are not related to property used in a trade or business). An exception exists for losses that occur in federally declared disaster areas.1
A taxpayer who sustains a theft loss may take the deduction for the tax year in which the taxpayer discovers the loss, rather than the year in which the loss was sustained (as is the general rule for casualty losses).2
The reasonable prospect of recovery doctrine (see Q 8716) applies in the case of theft losses,
so that the taxpayer will not be entitled to take a deduction if there is a claim for reimbursement against a third party that may fully or partially compensate the taxpayer for the theft loss, and there is a reasonable prospect that the taxpayer will recover these amounts.3 These rules do not apply to a theft loss discovered through a shortage in the inventories of a business.4