Pig Butchering Investment Scams: When “Too Good to Be True” Is Exactly That

Last edition, we covered the compromised account scam, where a fake fraud specialist convinces you to move your money to a “safe” account that turns out to be anything but. This time, we’re talking about something slicker—investment scams that rope you in slowly and take everything.

They call it pig butchering because the scammers “fatten up” victims first—showing small fake returns to build trust—before going for the big payout.

In one IRS case, a taxpayer received an unsolicited email promoting a crypto platform with huge profit potential. The platform looked legitimate, and after a few trial runs with small investments (which were returned successfully), they started moving more serious money—pulling from both IRA and non-IRA accounts.

Then came the silence. No responses. No withdrawals. No money.

Scammers use websites that mimic real investment platforms and feed victims false data. By the time the taxpayer realizes they’ve been scammed, the funds are long gone, often to overseas accounts.

From a tax perspective?

This type of loss might be deductible—but only if:

• You were investing with the intent to earn a profit.
• There’s no reasonable chance of getting the money back.
• The scam was discovered in the same year you’re claiming the loss.

In this case, the taxpayer was investing for income. That profit motive makes the loss deductible under §165(c)(2). But they still owe taxes on the IRA distribution and have to account for gains or losses in their brokerage account.

KRS Tip: If an investment seems too perfect, take a breath. Do a gut check. Then talk to someone you trust—before you send a dime.

Next up in our scam series: phishing scams—a few clicks, a fake link, and your accounts are wide open. Stay with us.

Source: IRS Memorandum #202511015, Allowance of Theft Losses for Victims of Scams Under I.R.C. Section 165, 3/14/2025