Over the last few years, “pig butchering” scams have become one the largest forms of online financial fraud, particularly in the cryptocurrency space. Victims of pig butchering scams have lost tens of billions of dollars worldwide, and that number is only increasing.
These scams can take several different forms, combining elements of romance fraud, investment schemes, and sophisticated social engineering. Scammers build trust over weeks or even months through friendly conversation, often on dating apps, social media, or text platforms. Once the victim feels comfortable, the scammer introduces the idea of investing in cryptocurrency, typically through what appears to be a legitimate trading platform. At first, small investments may appear to yield real profits. To further gain trust, the scammers will even allow the victims to withdraw small amounts of cryptocurrency from the platform to demonstrate that the profits are legitimate. But once larger sums are sent by the victims, and profits are purported to be substantial, the funds cannot be withdrawn, the victim is often informed of surprise fees, and the scammer eventually vanishes.
Understanding how to recognize the early warning signs of a pig butchering scam is the best line of defense. Below, we outline the key red flags to watch for, common tactics used by fraudsters, and steps to take if you suspect you’ve been targeted.
What Platforms Have Scammers Used to Initiate Contact with Potential Victims?
Pig butchering scams can begin slowly and methodically as the scammer seeks to develop trust and credibility with the victim. The scammers cast a wide net on a variety of platforms. We have seen pig butchering scams be initiated on the following platforms:
- Tinder (and other dating apps)
- Skype
- X (formerly Twitter)
- YouTube Ads
- Text message
What Happens After the Initial Contact is Established?
In nearly every instance, the scammer will suggest moving the conversation to a messaging app such as WhatsApp or LINE. In our experience WhatsApp is the most prevalent. In instances where the scammer is posing as some type of investment expert, they may add the victim to a purported “investment group” that discusses the recent success they’ve had beginning to invest in cryptocurrency.
The scammer may also pose as an “assistant” who works for a “professor” who claims to have had a lucrative investment career and has decided to teach as many people as possible how to achieve financial success through trading cryptocurrency. In other instances, the scammer may delay broaching the subject of cryptocurrency for several weeks until they’ve gained the victim’s trust. In the cases of a romance-style pig butchering scam, the scammer will introduce the victim to their family member or close friend who is a purported expert in cryptocurrency trading.
The “Investment” Platform
The scammer will often introduce the victim to the platform that they have allegedly used to earn large financial returns trading cryptocurrency. The name of the platform will often closely resemble the name of a legitimate cryptocurrency platform to deceive the victim into believing the platforms are associated. Some of the scam platforms even go so far as to register as a money services business (MSB) with the Financial Crimes Enforcement Network (FinCEN) to appear legitimate. FinCEN explicitly warns against fraudsters falsely registering as an MSB.
Within the platform, the user will often follow the advice of the scammer to select whether they want to “go long or short,, “buy up or buy down,” or a similar action that suggests the user is betting on the direction of the market. The platform may permit the user to select a duration of the trade, often ranging anywhere from 30 seconds to several hours or days.
It is quite common for the interactions with the scammer on WhatsApp to meticulously guide the victim step by step on how to use the platform using screenshots. The screenshots guide the victim on how to purchase cryptocurrency on a legitimate exchange such as Coinbase, Strike, or Crypto.com all the way through the process of transferring it to the fraudulent platform and executing the trades.
Once these transfers are completed, the victim’s funds are lost. Unfortunately, they just don’t know it yet.
Early Successful Test Withdrawals
Many pig butchering scam victims have little to no experience with cryptocurrency. As such, they are initially hesitant and will invest a small amount to start. Following the trade advice of the scammer, their initial trades will yield profits from a seemingly simple process.
While the victim’s guard is still up, they ask the scammer to help them withdraw the cryptocurrency to gain confidence in the platform, and these early withdrawals are usually successful.
Victims are Encouraged to Deposit Increasing Amounts of Money
Scammers will then begin to coax the victim to deposit large amounts of money, making claims that this is a once in a lifetime opportunity and potentially life-changing if the victim is willing to take larger risks. Scammers will show the victim pictures of their assets like expensive cars and homes to convince them to deposit more money. In other cases, victims are incentivized to deposit more by being offered access to “higher tier” investment groups on WhatsApp with more profitable trades. The catch is that they have to meet a minimum deposit amount to qualify for the higher tier groups.
Sudden Losses of All or Substantially All of the Funds in Their Account
In some cases, while the victim has started to believe that they have made substantially larger gains after depositing more funds, they may experience some type of event that depletes or nearly depletes the entire account, causing a sense of panic. This event may be failing to properly follow the trading advice from the purported expert, or some sudden and unexpected shift in the market. The victim is left with a sense of panic, and the scammer will claim they can help them recoup their losses if they continue trading on the platform.
Failed Attempts to Withdraw Funds and Surprise Fees or Taxes
Once the victim is under the impression that they have experienced significant financial gains on the platform, they will attempt to withdraw their funds. However, they won’t have the same experience as when they were able to withdraw a small amount when they first started using the platform. Instead, they will receive some type of communication – oftentimes from the platform’s supposed “customer support” – of various types of taxes or fees that must be paid before the withdrawal can be completed. These taxes and fees can take several forms.
In some instances, the platform indicates that the victim must pay income tax equal to a certain percentage of their perceived profits earned on the platform. Other times, the platform may indicate that a fee is required to be paid for anti-money laundering and identity verification purposes.
In nearly every case, when the victim requests that the taxes or fees be deducted from their profits on the platform, they are told that new funds are required to satisfy the required payment. The platform will also usually institute a deadline to comply with the payment, or the user risks losing the funds in their account, negative impacts to their credit, or some other penalty to induce panic in the victim. If the victim does comply with the payment, they will unfortunately learn that they still cannot withdraw their funds, and they may be assessed yet another fee.
Fictitious Loans Provided by the Platform or the Scammer
When the victim confronts the scammer who introduced them to the platform, they claim that such fees and taxes are normal and that they should comply. Unfortunately, at this point the victim may have exhausted most or all of their funds and do not have the money to pay the fees.
It is common for the scammer who they have been corresponding with or the platform itself to provide a “loan” to the victim to help pay the fees. The victim usually does not receive the fictitious loan directly. Instead, the funds are sent directly to their account on the platform. These loans are not real and are designed to coerce the victim to comply with the fees by creating a false sense of hope that their funds will be returned.
Can Pig Butchering Scam Victims Deduct These Losses on Their Tax Returns?
Yes, if certain conditions are met. Under IRC § 165, taxpayers can deduct losses incurred in transactions entered into for profit, though not connected with a trade or business. To justify the loss, the taxpayer must also show (1) that the loss results from a criminal act such as fraud, larceny, or embezzlement, (2) the theft was discovered in the year the taxpayer is claiming the loss, and (3) that there is no reasonable prospect of recovery.
Taxpayers looking to claim their losses from the scam on their tax returns must also understand that the deduction is limited to the taxpayers’ cost basis in the stolen property, not the perceived gains on the scam platform. Taxpayers need to also be mindful that if they claim a loss on their tax return and then recover any of their funds later, the recovered funds will be considered taxable income.
Should a Pig Butchering Scam Victim Get an Opinion Letter from a Tax Attorney?
Likely yes, especially if the loss is for $100,000 or more. If the taxpayer is audited, the IRS may disagree with the position taken on the tax return, resulting in the taxpayer repaying any tax that was saved by claiming the loss, as well as penalties and interest.
However, an opinion letter can increase the odds of a favorable outcome. Legal opinion letters must conform to specific standards. An opinion letter includes facts specific to the victim’s case, analysis of the relevant law as it applies to their situation, and ultimately a professional opinion as to whether the IRS would uphold the tax position. While an opinion letter does not guarantee that the IRS will agree with the tax write-off, at a minimum it provides protection against some of the penalties the IRS might otherwise assess.
At Gordon law, we have helped dozens of victims of pig butchering scams capture losses on their tax returns. In some cases, the victims lost millions of dollars but were able to lower their tax bill, and in certain instances were able to request significant tax refunds.
If you have been a victim of a pig slaughter scam and are looking to claim a loss or deduction on your taxes, talk to a tax professional ASAP.
The experienced Chicago tax lawyers at Gordon Law have focused on cryptocurrency for a decade, helping more than 1,000 investors save on their taxes. We’ll guide you through your options, provide honest advice, and—in the right circumstances—put a silver lining on your situation by substantially lowering your tax bill. Give us a call today to get started.
