Casualty (Theft) Loss: Adjusted Basis
Taxpayers, who have been defrauded, may be eligible for a tax loss deduction for their fraud damages if the fraud is considered theft under their state’s law (see Gerstell v. Commr. 46 T.C. 161 (1966)).
The IRS has published detailed guidelines for Casualty (Theft) Losses which include: Adjusted Basis
The measure of your investment in the property you own is its basis. For property you buy, your basis is usually its cost to you. For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551.
Adjustments to basis. While you own the property, various events may take place that change your basis. Some events, such as additions or permanent improvements to the property, increase basis. Others, such as earlier casualty losses and depreciation deductions, decrease basis. When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. See Publication 551 for more information on figuring the basis of your property.