Pig Butchering Victims Must Prove Theft Under State Criminal Law

“Pig butchering” — originating from the Chinese phrase sha zhu pan, a metaphor for fattening a victim before slaughter — isn’t a quick hustle. A scammer builds a relationship over weeks or months, often starting on a dating app or messaging platform, and gradually steers the victim into cryptocurrency investments that appear to be generating real returns. Fabricated trading platforms display rising balances and fictitious gains. Trust deepens. Then the money disappears and the victims are ghosted. This article takes up three questions: whether pig butchering losses qualify for a §165 theft loss deduction, whether the Tax Cuts and Jobs Act blocks the claim, and what it takes to prove theft under state criminal law when no one has been charged.

The numbers now make clear that pig butchering isn’t a niche fraud. In 2025, cryptocurrency investment fraud alone generated $7.2 billion in reported losses — a 25% increase from the prior year — across more than 61,000 complaints filed with the FBI. The operations behind these numbers aren’t freelance hustlers. They are organized criminal enterprises based in Southeast Asia, many of them staffed by victims of human trafficking forced to run the scams.

CCA 202511015 confirms that victims of pig butchering may claim a theft loss deduction under §165 if they meet three requirements, and only two of them are straightforward:

• The loss must arise from a transaction entered into for profit.
• There must be no reasonable prospect of recovering the stolen funds.
• The loss must result from conduct that qualifies as theft under applicable state law.

The TCJA Problem

The IRS’s acknowledgement that pig-butchering losses can qualify as theft doesn’t end the analysis; rather, it begins it. The threshold question is whether the loss is deductible at all. That question became more complicated after the TCJA. Section 165(h)(5), added by the TCJA, suspended personal casualty and theft losses for taxpayers for tax years 2018 through 2025 unless attributable to a federally declared disaster. Read broadly, that provision appears to eliminate theft-loss deductions for most scam victims.

But §165(h)(5) doesn’t suspend all theft losses, only those claimed under §165(c)(3) — losses of personal, nonbusiness property. A different route remains open under §165(c)(2), which allows deductions for losses incurred in transactions entered into for profit.

That distinction is critical in pig-butchering cases. Victims don’t transfer funds as gifts or personal expenditure. They transfer them with the expectation of profit, which moves the loss out of §165(c)(3) and into §165(c)(2), where the TCJA suspension doesn’t apply. But this route carries its own burden: The taxpayer must still establish that a theft occurred under applicable state law.

The profit motive may preserve the deduction. It doesn’t establish a theft. That is where the federal tax analysis gives way to state criminal law.

What Theft Requires

The definition of “theft” for §165 purposes sweeps in a wide range of criminal conduct — larceny, embezzlement, robbery, swindling, false pretenses, “any other form of guile.” The harder question is what it takes to prove that one occurred.

The underlying concepts are creatures of state criminal law. A taxpayer claiming a theft loss must prove the loss resulted from a taking of property that was illegal under the law of the jurisdiction in which it occurred and was done with criminal intent. Which state’s law applies is determined by where the loss occurred, typically where the victim received the inducement communications and made the decision to invest.

That requirement — proving theft under state law — is where the analysis shifts from tax to criminal law. State theft statutes aren’t uniform, and the differences shape whether a pig-butchering victim can sustain a §165 deduction on audit.

Tale of Three Statutes

Consider three states among those with the highest reported cryptocurrency fraud losses. According to the FBI’s 2025 Internet Crime Report, California led at $2.1 billion, followed by Florida at $915 million and New York at $593 million. Each defines theft differently and the differences matter on audit.

Florida: no special hurdles. A majority of states, influenced by the Model Penal Code, have consolidated larceny, embezzlement, false pretenses, and theft by deception into a single, comprehensive theft statute. In those jurisdictions, the taxpayer’s burden is limited to proving the basic elements — an illegal taking, done with criminal intent.

Florida’s theft statute maps directly onto pig-butchering’s mechanics. Under Florida law, theft is knowingly obtaining or using another’s property with intent to deprive — and the statute explicitly includes obtaining property by fraud, willful misrepresentation of a future act, or false promise. Fla. Stat. §812.014, §812.012(3). The scammer knowingly obtained the victim’s cryptocurrency through a fabricated investment platform, with the intent to permanently deprive. Florida’s statute requires little more.

Florida also imposes enhanced penalties when the victim is 65 or older — a relevant consideration given that victims in that age group accounted for $4.3 billion in total cryptocurrency fraud losses in 2025. Pig butchering losses — routinely six or seven figures — clear the dollar thresholds for grand theft with room to spare. For clients in these jurisdictions, the state-law theft element shouldn’t present a significant obstacle.

California: evidentiary requirements. California starts where Florida does but adds another layer. Penal Code §484(a) criminalizes obtaining property “by any false or fraudulent representation or pretense,” requiring proof that the defendant intended to defraud at the time the property was obtained. Nothing in the definition would exclude pig butchering. On the contrary, the structure of the scheme fits comfortably within it: A victim transfers money in reliance on a series of knowingly false representations about a supposedly legitimate investment opportunity.

Because these schemes often involve a sequence of escalating transfers rather than a single transaction, Penal Code §487(e) allows aggregation of related takings pursuant to “one intention, one impulse, and one plan.” That maps neatly onto the architecture of a pig-butchering scam, where the fraud unfolds incrementally—an initial deposit, apparent gains, a larger reinvestment, and eventually repeated demands for “fees” or “taxes” to release funds that don’t actually exist.

So far, California looks straightforward. The complication is Penal Code §532(a), which separately criminalizes obtaining property by false pretenses, overlapping substantially with §484(a), but carrying an additional evidentiary requirement. Under §532(b), a false pretense can’t be proven by the victim’s testimony alone. It must be corroborated by either a false token or writing, a note or memorandum subscribed by the defendant, testimony from two witnesses, or testimony from one witness plus corroborating circumstances.

Pig butchering schemes are conducted almost entirely in writing — in WhatsApp messages, texts, emails, and fabricated platform interfaces showing investment returns that never existed — and those writings satisfy the corroboration requirement on their own. Wire transfer records and blockchain transaction histories corroborate the rest. The corroboration requirement asks only that the evidence tend to connect the defendant with the fraud in a way that reasonably supports the victim’s account. In pig butchering, that evidence isn’t scarce. It’s the record of the crime itself.

Section 532 adds a requirement Florida doesn’t impose. In pig butchering, it adds very little work. The evidence doesn’t need to be found — it needs to be preserved.

New York: heightened intent standards. New York Penal Law §155.05(1) defines larceny broadly as the wrongful taking, obtaining, or withholding of property with intent to deprive another of property or to appropriate the same to the defendant or to a third person. Standing alone, that framework poses no unusual problem for pig-butchering claims. But §155.05(2) subdivides larceny into specific forms, and one of them — larceny by false promise — creates a higher substantive hurdle.

That matters because pig-butchering schemes are built largely on promises of future investment returns. Unlike classic false-pretense statutes, which focus on misrepresentations of present fact, New York’s false-promise statute addresses a different problem; promises made without any intention of performance.

New York draws that line carefully. Under §155.05(2)(d), a defendant’s intent not to perform cannot be inferred merely because the promise was later broken. The evidence must point entirely to guilty intent — and entirely away from any innocent one. This requirement reflects a deliberate legislative choice: to ensure that failed business dealings cannot be recast as theft. The New York Court of Appeals has applied this standard to investment fraud before, finding it satisfied where the scheme’s architecture made clear that each promise of future returns was “infected” with falsity from the moment it was made. People v. Luongo, 47 N.Y.2d 418 (1979).

Under New York law, the taxpayer must prove not simply that the investment failed, but that the scammer never intended to perform at all — that the deception existed from inception. In a pig-butchering case, the evidence often makes that showing. The fictitious platform, the fabricated account balances, the untraceable wallets, and the coordinated disappearance all point to a scheme that was fraudulent from the start, not a promise that simply went unfulfilled. The facts of pig butchering aren’t ambiguous. The scammer didn’t fail to perform. There was never anything to perform.

Proving this is the harder problem. The scammer is anonymous, overseas, and beyond the reach of prosecution. That is where the state-law distinctions become critical: Without a criminal case, the victim must independently establish every element of the applicable theft statute. Victims also can’t access the Ponzi loss safe harbor under Rev. Proc. 2009-20, which requires the perpetrator to have been charged or subject to a criminal complaint — a condition pig-butchering victims almost never meet.

Federal enforcement is accelerating — the DOJ’s 2025 indictment of Chen Zhi, the alleged operator of forced labor pig-butchering compounds in Cambodia, produced what the DOJ described as the largest forfeiture action in its history — but criminal enforcement helps victims access the Rev. Proc. 2009-20 safe harbor only where a charging document names the perpetrator of their specific loss.

For most victims, no such case exists. They are left proving theft without the criminal process that ordinarily generates the record.

Building the Record

That reconstruction usually begins with the communications:text messages, WhatsApp chats, Telegram threads, dating app messages, and email exchanges contain the earliest misrepresentation—the false identity, the fabricated expertise, the invitation to invest. These records are often the clearest evidence of inducement, showing how the scam began and why the victim acted.

Next comes the money trail. Wire confirmations, ACH transfers, crypto wallet addresses, exchange records, and blockchain tracing can establish where the funds went – and just as importantly, whether the money ever reached a legitimate investment platform at all. The money often moves immediately into wallets controlled by the fraud operation through a chain of transfers designed to obscure its path and frustrate recovery.

Then there is the platform itself. Screenshots of account balances, transaction histories, and withdrawal denials often do more than document the loss. They can establish the mechanics of the fraud itself: fictitious gains, fabricated liquidity, or fake tax or fee demands designed to induce additional transfers or investments. In California, those materials can also serve as the corroborated writings or false tokens the criminal statute requires.

Law enforcement reports matter too. An FBI Internet Crime Complaint Center (IC3) complaint, local police report, or exchange fraud report won’t establish theft by itself, but can help fix the chronology and show the taxpayer treated the loss as fraud when it happened.

For practitioners advising pig-butchering victims, the takeaway is concrete: Treat the state-law theft element as a contested issue, not a formality. The work is less about documenting a loss than proving a theft. The communications establish the inducement. The blockchain records establish the taking. The platform screenshots establish the mechanics of the fraud. Each piece of evidence maps to a statutory element.

Pig-butchering losses expose an unusual feature of the tax law. The deduction lives in the tax code, but it depends on proving conduct defined by criminal law, often without a criminal case to prove it. For taxpayers and their advisers, that means the question is never just what was lost. It’s whether the record proves why it was lost.

Reproduced with permission. Published July 23, 2026. Copyright 2026 Bloomberg Industry Group 800-372-1033. For further use please visit https://www.bloombergindustry.com/copyright-and-usage-guidelines-copyright/