26 U.S.C. § 165 : US Code - Section 165: Losses

Search 26 U.S.C. § 165 : US Code - Section 165: Losses

(a) General rule
There shall be allowed as a deduction any loss sustained during
the taxable year and not compensated for by insurance or otherwise.
(b) Amount of deduction
For purposes of subsection (a), the basis for determining the
amount of the deduction for any loss shall be the adjusted basis
provided in section 1011 for determining the loss from the sale or
other disposition of property.
(c) Limitation on losses of individuals
In the case of an individual, the deduction under subsection (a)
shall be limited to -
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered into for profit,
though not connected with a trade or business; and
(3) except as provided in subsection (h), losses of property
not connected with a trade or business or a transaction entered
into for profit, if such losses arise from fire, storm,
shipwreck, or other casualty, or from theft.
(d) Wagering losses
Losses from wagering transactions shall be allowed only to the
extent of the gains from such transactions.
(e) Theft losses
For purposes of subsection (a), any loss arising from theft shall
be treated as sustained during the taxable year in which the
taxpayer discovers such loss.
(f) Capital losses
Losses from sales or exchanges of capital assets shall be allowed
only to the extent allowed in sections 1211 and 1212.
(g) Worthless securities
(1) General rule
If any security which is a capital asset becomes worthless
during the taxable year, the loss resulting therefrom shall, for
purposes of this subtitle, be treated as a loss from the sale or
exchange, on the last day of the taxable year, of a capital
asset.
(2) Security defined
For purposes of this subsection, the term "security" means -
(A) a share of stock in a corporation;
(B) a right to subscribe for, or to receive, a share of stock
in a corporation; or
(C) a bond, debenture, note, or certificate, or other
evidence of indebtedness, issued by a corporation or by a
government or political subdivision thereof, with interest
coupons or in registered form.
(3) Securities in affiliated corporation
For purposes of paragraph (1), any security in a corporation
affiliated with a taxpayer which is a domestic corporation shall
not be treated as a capital asset. For purposes of the preceding
sentence, a corporation shall be treated as affiliated with the
taxpayer only if -
(A) the taxpayer owns directly stock in such corporation
meeting the requirements of section 1504(a)(2), and
(B) more than 90 percent of the aggregate of its gross
receipts for all taxable years has been from sources other than
royalties, rents (except rents derived from rental of
properties to employees of the corporation in the ordinary
course of its operating business), dividends, interest (except
interest received on deferred purchase price of operating
assets sold), annuities, and gains from sales or exchanges of
stocks and securities.
In computing gross receipts for purposes of the preceding
sentence, gross receipts from sales or exchanges of stocks and
securities shall be taken into account only to the extent of
gains therefrom.
(h) Treatment of casualty gains and losses
(1) $100 limitation per casualty
Any loss of an individual described in subsection (c)(3) shall
be allowed only to the extent that the amount of the loss to such
individual arising from each casualty, or from each theft,
exceeds $100.
(2) Net casualty loss allowed only to the extent it exceeds 10
percent of adjusted gross income
(A) In general
If the personal casualty losses for any taxable year exceed
the personal casualty gains for such taxable year, such losses
shall be allowed for the taxable year only to the extent of the
sum of -
(i) the amount of the personal casualty gains for the
taxable year, plus
(ii) so much of such excess as exceeds 10 percent of the
adjusted gross income of the individual.
(B) Special rule where personal casualty gains exceed personal
casualty losses
If the personal casualty gains for any taxable year exceed
the personal casualty losses for such taxable year -
(i) all such gains shall be treated as gains from sales or
exchanges of capital assets, and
(ii) all such losses shall be treated as losses from sales
or exchanges of capital assets.
(3) Definitions of personal casualty gain and personal casualty
loss
For purposes of this subsection -
(A) Personal casualty gain
The term "personal casualty gain" means the recognized gain
from any involuntary conversion of property which is described
in subsection (c)(3) arising from fire, storm, shipwreck, or
other casualty, or from theft.
(B) Personal casualty loss
The term "personal casualty loss" means any loss described in
subsection (c)(3). For purposes of paragraph (2), the amount of
any personal casualty loss shall be determined after the
application of paragraph (1).
(4) Special rules
(A) Personal casualty losses allowable in computing adjusted
gross income to the extent of personal casualty gains
In any case to which paragraph (2)(A) applies, the deduction
for personal casualty losses for any taxable year shall be
treated as a deduction allowable in computing adjusted gross
income to the extent such losses do not exceed the personal
casualty gains for the taxable year.
(B) Joint returns
For purposes of this subsection, a husband and wife making a
joint return for the taxable year shall be treated as 1
individual.
(C) Determination of adjusted gross income in case of estates
and trusts
For purposes of paragraph (2), the adjusted gross income of
an estate or trust shall be computed in the same manner as in
the case of an individual, except that the deductions for costs
paid or incurred in connection with the administration of the
estate or trust shall be treated as allowable in arriving at
adjusted gross income.
(D) Coordination with estate tax
No loss described in subsection (c)(3) shall be allowed if,
at the time of filing the return, such loss has been claimed
for estate tax purposes in the estate tax return.
(E) Claim required to be filed in certain cases
Any loss of an individual described in subsection (c)(3) to
the extent covered by insurance shall be taken into account
under this section only if the individual files a timely
insurance claim with respect to such loss.
(i) Disaster losses
(1) Election to take deduction for preceding year
Notwithstanding the provisions of subsection (a), any loss
attributable to a disaster occurring in an area subsequently
determined by the President of the United States to warrant
assistance by the Federal Government under the Robert T. Stafford
Disaster Relief and Emergency Assistance Act may, at the election
of the taxpayer, be taken into account for the taxable year
immediately preceding the taxable year in which the disaster
occurred.
(2) Year of loss
If an election is made under this subsection, the casualty
resulting in the loss shall be treated for purposes of this title
as having occurred in the taxable year for which the deduction is
claimed.
(3) Amount of loss
The amount of the loss taken into account in the preceding
taxable year by reason of paragraph (1) shall not exceed the
uncompensated amount determined on the basis of the facts
existing at the date the taxpayer claims the loss.
(4) Use of disaster loan appraisals to establish amount of loss
Nothing in this title shall be construed to prohibit the
Secretary from prescribing regulations or other guidance under
which an appraisal for the purpose of obtaining a loan of Federal
funds or a loan guarantee from the Federal Government as a result
of a Presidentially declared disaster (as defined by section
1033(h)(3)) may be used to establish the amount of any loss
described in paragraph (1) or (2).
(j) Denial of deduction for losses on certain obligations not in
registered form
(1) In general
Nothing in subsection (a) or in any other provision of law
shall be construed to provide a deduction for any loss sustained
on any registration-required obligation unless such obligation is
in registered form (or the issuance of such obligation was
subject to tax under section 4701).
(2) Definitions
For purposes of this subsection -
(A) Registration-required obligation
The term "registration-required obligation" has the meaning
given to such term by section 163(f)(2) except that clause (iv)
of subparagraph (A), and subparagraph (B), of such section
shall not apply.
(B) Registered form
The term "registered form" has the same meaning as when used
in section 163(f).
(3) Exceptions
The Secretary may, by regulations, provide that this subsection
and section 1287 shall not apply with respect to obligations held
by any person if -
(A) such person holds such obligations in connection with a
trade or business outside the United States,
(B) such person holds such obligations as a broker dealer
(registered under Federal or State law) for sale to customers
in the ordinary course of his trade or business,
(C) such person complies with reporting requirements with
respect to ownership, transfers, and payments as the Secretary
may require, or
(D) such person promptly surrenders the obligation to the
issuer for the issuance of a new obligation in registered form,
but only if such obligations are held under arrangements provided
in regulations or otherwise which are designed to assure that
such obligations are not delivered to any United States person
other than a person described in subparagraph (A), (B), or (C).
(k) Treatment as disaster loss where taxpayer ordered to demolish
or relocate residence in disaster area because of disaster
In the case of a taxpayer whose residence is located in an area
which has been determined by the President of the United States to
warrant assistance by the Federal Government under the Robert T.
Stafford Disaster Relief and Emergency Assistance Act, if -
(1) not later than the 120th day after the date of such
determination, the taxpayer is ordered, by the government of the
State or any political subdivision thereof in which such
residence is located, to demolish or relocate such residence, and
(2) the residence has been rendered unsafe for use as a
residence by reason of the disaster,
any loss attributable to such disaster shall be treated as a loss
which arises from a casualty and which is described in subsection
(i).
(l) Treatment of certain losses in insolvent financial institutions
(1) In general
If -
(A) as of the close of the taxable year, it can reasonably be
estimated that there is a loss on a qualified individual's
deposit in a qualified financial institution, and
(B) such loss is on account of the bankruptcy or insolvency
of such institution,
then the taxpayer may elect to treat the amount so estimated as a
loss described in subsection (c)(3) incurred during the taxable
year.
(2) Qualified individual defined
For purposes of this subsection, the term "qualified
individual" means any individual, except an individual -
(A) who owns at least 1 percent in value of the outstanding
stock of the qualified financial institution,
(B) who is an officer of the qualified financial institution,
(C) who is a sibling (whether by the whole or half blood),
spouse, aunt, uncle, nephew, niece, ancestor, or lineal
descendant of an individual described in subparagraph (A) or
(B), or
(D) who otherwise is a related person (as defined in section
267(b)) with respect to an individual described in subparagraph
(A) or (B).
(3) Qualified financial institution
For purposes of this subsection, the term "qualified financial
institution" means -
(A) any bank (as defined in section 581),
(B) any institution described in section 591,
(C) any credit union the deposits or accounts in which are
insured under Federal or State law or are protected or
guaranteed under State law, or
(D) any similar institution chartered and supervised under
Federal or State law.
(4) Deposit
For purposes of this subsection, the term "deposit" means any
deposit, withdrawable account, or withdrawable or repurchasable
share.
(5) Election to treat as ordinary loss
(A) In general
In lieu of any election under paragraph (1), the taxpayer may
elect to treat the amount referred to in paragraph (1) for the
taxable year as an ordinary loss described in subsection (c)(2)
incurred during the taxable year.
(B) Limitations
(i) Deposit may not be federally insured
No election may be made under subparagraph (A) with respect
to any loss on a deposit in a qualified financial institution
if part or all of such deposit is insured under Federal law.
(ii) Dollar limitation
With respect to each financial institution, the aggregate
amount of losses attributable to deposits in such financial
institution to which an election under subparagraph (A) may
be made by the taxpayer for any taxable year shall not exceed
$20,000 ($10,000 in the case of a separate return by a
married individual). The limitation of the preceding sentence
shall be reduced by the amount of any insurance proceeds
under any State law which can reasonably be expected to be
received with respect to losses on deposits in such
institution.
(6) Election
Any election by the taxpayer under this subsection for any
taxable year -
(A) shall apply to all losses for such taxable year of the
taxpayer on deposits in the institution with respect to which
such election was made, and
(B) may be revoked only with the consent of the Secretary.
(7) Coordination with section 166
Section 166 shall not apply to any loss to which an election
under this subsection applies.
(m) Cross references
(1) For special rule for banks with respect to worthless
securities, see section 582.
(2) For disallowance of deduction for worthlessness of
securities to which subsection (g)(2)(C) applies, if issued by
a political party or similar organization, see section 271.
(3) For special rule for losses on stock in a small business
investment company, see section 1242.
(4) For special rule for losses of a small business
investment company, see section 1243.
(5) For special rule for losses on small business stock, see
section 1244.