Are Pirate Ransoms Tax-Deductible?

(Photo: lamont_cranston)

Reader Martin Dimitrov writes in:

Are ransoms paid to pirates tax-deductible? The question actually makes sense to me. If we can pay medical insurance and dependent care pre-tax, we should be able to deduct the ransoms (typically a substantial sum) paid to save our relatives/dependents. 

According to the IRS, the answer is yes, since kidnapping ransom qualifies as theft, along with blackmail, embezzlement, and extortion. You must, however, show proof of your loss. So make sure to get a receipt, or file a police report. A recent court order in India also allows for tax deduction on ransom. This has some lawmakers worrying about a potential unintended consequence: a spike in fake kidnappings.

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  1. CM Sullivan says:

    It seems that allowing the deduction makes ransoms cheaper, thereby allowing pirates to charge more. After all, the pirate cannot extort more than the victim is able (or willing) to pay. When the ransom is for an asset (like a ship) rather than a person, the amount the victim is willing and able to pay is an economic cost/benefit calculation. If the government does not allow the deduction would it not be — in effect — forcing the pirates to share some of the loot?

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  2. Derek Vlcko says:

    On the other end of the equation, would Pirates be required to pay taxes on Treasure discoveries?

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    • Pablo says:

      Actually, Pirates have always paid taxes. Consider colonialism (e.g. India in the times of Gandhi and inhabitants in Malvinas nowadays)

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  3. Mike B says:

    You learn something new every day.

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  4. Ian says:

    Ask the Eye-Arrrr-S……

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  5. James says:

    “… potential unintended consequence: a spike in fake kidnappings.”

    Not a new idea. It was the plot of Rex Stout’s “The Final Deduction”, written in the late ’50s-early ’60s, when the top tax rate was at 90%.

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  6. Colin says:

    If it’s categorized like embezzlement or extortion, that would also mean that Massachusetts pirates would be taxed in the 5% earned income bracket, rather than the 12.3% capital gains brackets. Apparently corporate raiding is more highly disincentivized in the Bay State than, well, raiding.

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  7. carlosmx37 says:

    for some of you who think that nothing new is under the sun,..let me tell you that in Mexico,gangs known as “familia michoacana”,and “zetas”,control extensive areas,and in the style of the al capone many years ago,they ask for some money for the “insurance”…well,.if the owner of the small tortillas shop, do requiere it,
    .These bands send an accountant who advises the owner how to justify the anormal payment in the tax statement..then,it is not rare the owner who pays six salaries,-real persons who do not work at the shop-,instance of just three before he decided to accept the insurance.
    yes1,.in Mexico,as in any other modern economy,the owner gets a receipt from His extorters!

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  8. Ben says:

    Small world, as I had only recently run into the sad tale of J. Paul Getty, earlier billionaire, who once refused to pay a 3 million ransom on his 16 year old son, because only 2.2 million would be tax deductible (this was 1973.) He ended up loaning the balance to his other son at interest, and they ultimately paid the ransom, though it appears J. Paul Getty never forgave his son for the expense, and the son was so damaged by the encounter he never fully recovered.

    http://en.wikipedia.org/wiki/J._Paul_Getty

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