Cybercrime and taxes

As the farmer received the money, this is Schedule F income. Under the Internal Revenue Code (IRC) 165, a taxpayer is allowed to deduct a theft if he can prove (1) the occurrence of theft, (2) a quantifiable loss and (3) the date on which the taxpayer discovers the theft. While there are no clear guidelines, there is an income rule that implies that the deduction would offset self-employment income.

Keep in mind that between the 2015 and 2018 tax years, a deduction is only available for losses that arose in the course of a trade or business, or a transaction entered into for the purposes of lucrative. Personal (non-agricultural) losses for cybercrime are not deductible.

SCENARIO 2

A farmer or food company has a hacked computer system and is locked down. The cybercriminal contacts the farmer / company and asks for $ 1 million to release and unlock the software. Under IRC 162 (a), the taxpayer can deduct ordinary and necessary business expense. As cybercrime is more common, it can be argued that ransomware payments are ordinary and necessary. If the argument is accepted, the taxpayer can charge the payment for the ransomware.

A couple of things strike me about the facts of both scenarios. If you are an individual and cybercrime is not about a business or a business, you have little recourse. Even if you are in a trade or business, you get a deduction / expense that results in reduced taxable income, but that doesn’t make you whole. When it comes to cybercrime, no matter the resolution, it’s a lose-lose situation.

What can you do?

The easiest way would be to change your passwords regularly. Another simple step is to check your bank accounts frequently and identify fraudulent transactions.

Since many of my farm clients deposit and withdraw millions of dollars a year, I often recommend speaking to a cybersecurity expert and developing an IT security plan (including testing). With cybercrime, the old adage holds true, an ounce of prevention is better than a pound of cure.

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DTN tax columnist Rod Mauszycki, JD, MBT, is a tax director at CLA (CliftonLarsonAllen) in Minneapolis, Minnesota. Read Rod’s “Ask the Taxman” column at about.dtnpf.com/tax. You can email Rod at [email protected]

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