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Crypto Law/Level IV · Holders' traps/4.2 Scams the law sees/Lesson 1

Pig-butchering and romance scams

How relationship investment scams work, who runs them, how US law and regulators respond, and how the tax system treats what a victim loses.

Education, not legal, tax or investment advice. Crypto law differs between countries and states and changes often. Check the current rules where you live with a qualified lawyer or tax adviser before you act.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Free self-protection: never invest through a platform a new online contact recommends; regulators (FinCEN FIN-2023-Alert005, joint SEC/CFTC/FINRA/NASAA alert) name that as the pattern, and paying ‘taxes’ to withdraw only adds losses.
  2. Report free at ic3.gov and ReportFraud.ftc.gov with transaction hashes and addresses; Operation Level Up uses these reports, and people aged 60+ can get filing help from the Elder Justice Hotline, 1-833-372-8311.
  3. Money sent to invest may be a deductible theft loss under 26 U.S.C. §165(c)(2) on Form 4684, in the year no reasonable recovery prospect remains (IRS CCA 202511015); purely romantic, no-profit losses stay nondeductible under §165(h)(5).
  4. Refuse any offered ‘job’ receiving or forwarding money: the CFTC warns this is acting as a money mule, a form of money laundering that exposes the recruit to prosecution.

MaterialsFinCEN Alert FIN-2023-Alert005 (8 September 2023), the US Treasury’s alert on ‘pig butchering’The FBI Internet Crime Complaint Center’s 2025 Internet Crime Report, section on cryptocurrency investment fraudThe joint SEC, CFTC, FINRA and NASAA investor alert ‘Relationship Investment Scams’IRS Chief Counsel Memorandum 202511015 (released 14 March 2025) on theft losses from scams

Wonder

  1. How can someone I have never met in person talk me into sending my savings?
  2. Why did the platform let me withdraw small amounts at first if it was a fraud?
  3. If I lost money this way, does the law treat it as theft, and can I deduct the loss?

Explore

  1. ‘Pig butchering’ is the scammers’ own name for a long con: they ‘fatten’ a target with trust and then ‘slaughter’ them by taking everything. US regulators now often say ‘relationship investment scam’ instead; a joint alert by the SEC, CFTC, FINRA and NASAA calls the older term distasteful. Contact starts with a ‘wrong number’ text, a dating app, social media or a professional network, then moves to a private messaging app. After weeks of friendship or romance comes an investment tip in crypto, gold or currencies. A classic romance scam asks for money for an emergency; this version asks the target to invest, so each payment feels like their own decision.
  2. The mechanics follow a script that FinCEN and the FBI have described. The target buys crypto at a real exchange or a crypto kiosk and sends it to a deposit address shown on a fake trading platform or app (lesson 4.2.2). The screen shows fast gains, and small early withdrawals are allowed to build confidence. The CFTC reports research finding that victims make on average 10 payments, each larger than the last. Some are offered ‘loans’ to invest more. When the target tries to cash out, they are told to pay ‘taxes’ or ‘fees’ first, which the FBI describes as a final attempt to extract money before the scammers disappear.
  3. The scale is large. In its 2025 report the FBI’s Internet Crime Complaint Center (IC3) recorded 61,559 complaints of cryptocurrency investment fraud with about $7.2 billion in reported losses, the highest source of losses to Americans that year. People aged 60 and over reported about $2.76 billion of it. These are only losses people chose to report. Operation Level Up, an FBI effort launched in January 2024, uses complaint data to contact victims who are still sending money; in 2025 it notified 3,780 people, and 78% of them did not yet know they were being scammed.
  4. FinCEN’s 2023 alert says these scams are largely run by criminal organisations based in Southeast Asia that use victims of labour trafficking to send the messages, so the person typing may also be a victim. On 14 October 2025 the US Justice Department charged Chen Zhi, chairman of Cambodia’s Prince Group, with wire fraud conspiracy and money laundering conspiracy over forced-labour scam compounds, and filed a forfeiture complaint for about 127,271 bitcoin, which it called the largest forfeiture action in its history. The same day Treasury sanctioned 146 Prince Group targets and cut Huione Group off from the US financial system. In January 2026 Chinese authorities said Cambodia had handed him over to China.
  5. For the person who loses money, US federal law treats the scheme as crime, not a bad trade: it is wire fraud under 18 U.S.C. §1343, punishable by up to 20 years in prison, usually alongside money laundering. Banks are part of the response. FinCEN asks them to use the key term ‘FIN-2023-PIGBUTCHERING’ when they file suspicious activity reports, which is one reason a bank may question a large, sudden crypto purchase. There is a trap for victims too: the CFTC warns that scammers later offer ‘jobs’ receiving and forwarding money. That is acting as a money mule, a form of money laundering that can expose the recruit to prosecution.
  6. Tax is a second hit. IRS Chief Counsel Memorandum 202511015 concluded that a pig-butchering victim who sent money in order to invest had a theft loss in a transaction entered into for profit under 26 U.S.C. §165(c)(2), deductible in the year there was no reasonable prospect of recovery. A romance-scam victim who sent money with no profit motive had a personal loss that §165(h)(5) disallows; a July 2025 law, Pub. L. 119-21, made that limit permanent. The memo applies the law to example facts and is not a regulation. A practical check: a new online contact who steers you to an investment platform matches the pattern regulators describe.

Key facts

  • FinCEN issued Alert FIN-2023-Alert005 on pig-butchering scams on 8 September 2023 and asks banks to use the SAR key term ‘FIN-2023-PIGBUTCHERING’.
  • The FBI IC3 recorded 61,559 cryptocurrency investment fraud complaints in 2025, with about $7.2 billion in reported losses.
  • On 14 October 2025 the US Justice Department filed a forfeiture complaint for about 127,271 bitcoin linked to Prince Group chairman Chen Zhi.
  • On 14 October 2025 OFAC sanctioned 146 targets in the Prince Group network and FinCEN finalised a section 311 rule against Huione Group.
  • IRS Chief Counsel Memorandum 202511015 treats a pig-butchering loss as a theft loss in a transaction entered into for profit under §165(c)(2).
  • Under 26 U.S.C. §165(h)(5), as amended by Pub. L. 119-21, most personal casualty and theft losses of individuals remain nondeductible after 2025.

Exercise nine, six, three, one

9CollectList up to 9 warning signs from a real or reported relationship investment scam, such as a wrong-number text, a move to a private app, a new trading platform, fast paper gains, or a demand for fees to withdraw.
6ClusterSort them into 6 categories: first contact, building trust, the investment pitch, the platform, the cash-out demand, and pressure or secrecy.
3DistillReduce the 6 categories to 3 points where an outsider such as a bank, a friend or a regulator could most easily notice something was wrong.
1CrystallizeWrite 1 sentence describing what you would check before sending money to anyone you have met only online.

Fact check

Dates, figures and claims checked against the published sources listed below.

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