26 U.S.C. § 165: Losses

There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. 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. losses incurred in a trade or business; losses incurred in any transaction entered into for profit, though not connected with a trade or business; and 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. shall be equal to 90 percent of the amount of such losses during such taxable year, and shall be allowed only to the extent of the gains from such transactions during such taxable year. For purposes of paragraph (1), the term “losses from wagering transactions” includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction. 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. Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212. 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. a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock in a corporation; or 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. the taxpayer owns directly stock in such corporation meeting the requirements of section 1504(a)(2), and 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. 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 $500 ($100 for taxable years beginning after December 31, 2009 ). the amount of the personal casualty gains for the taxable year, plus so much of such excess as exceeds 10 percent of the adjusted gross income of the individual. all such gains shall be treated as gains from sales or exchanges of capital assets, and all such losses shall be treated as losses from sales or exchanges of capital assets. 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. 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). 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. For purposes of this subsection, a husband and wife making a joint return for the taxable year shall be treated as 1 individual. 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. 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. 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. In the case of an individual, except as provided in subparagraph (B), any personal casualty loss which (but for this paragraph) would be deductible in a taxable year beginning after December 31, 2017 , shall be allowed as a deduction under subsection (a) only to the extent it is attributable to a Federally declared disaster (as defined in subsection (i)(5)) or a State declared disaster. subparagraph (A) shall not apply to the portion of the personal casualty loss not attributable to a Federally declared disaster (as so defined) or a State declared disaster to the extent such loss does not exceed such gains, and in applying paragraph (2) for purposes of subparagraph (A) to the portion of personal casualty loss which is so attributable to such a disaster, the amount of personal casualty gains taken into account under paragraph (2)(A) shall be reduced by the portion of such gains taken into account under clause (i). The term “State declared disaster” means, with respect to any State, any natural catastrophe (including any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought), or, regardless of cause, any fire, flood, or explosion, in any part of the State, which in the determination of the Governor of such State (or the Mayor, in the case of the District of Columbia) and the Secretary causes damage of sufficient severity and magnitude to warrant the application of the rules of this section. The term “State” includes the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands. Notwithstanding the provisions of subsection (a), any loss occurring in a disaster area and attributable to a federally declared disaster 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. 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. 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. 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 federally declared disaster may be used to establish the amount of any loss described in paragraph (1) or (2). The term “Federally 1 declared disaster” means any disaster 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. 1 So in original. Probably should not be capitalized. The term “disaster area” means the area so determined to warrant such assistance. 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). The term “registration-required obligation” has the meaning given to such term by section 163(f)(2). The term “registered form” has the same meaning as when used in section 163(f). such person holds such obligations in connection with a trade or business outside the United States, 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, such person complies with reporting requirements with respect to ownership, transfers, and payments as the Secretary may require, or such person promptly surrenders the obligation to the issuer for the issuance of a new obligation in registered form, 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 the residence has been rendered unsafe for use as a residence by reason of the disaster, 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 such loss is on account of the bankruptcy or insolvency of such institution, who owns at least 1 percent in value of the outstanding stock of the qualified financial institution, who is an officer of the qualified financial institution, 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 who otherwise is a related person (as defined in section 267(b)) with respect to an individual described in subparagraph (A) or (B). any bank (as defined in section 581), any institution described in section 591, 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 any similar institution chartered and supervised under Federal or State law. For purposes of this subsection, the term “deposit” means any deposit, withdrawable account, or withdrawable or repurchasable share. 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. 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. 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. 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 may be revoked only with the consent of the Secretary. Section 166 shall not apply to any loss to which an election under this subsection applies. For special rule for banks with respect to worthless securities, see section 582. 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. For special rule for losses on stock in a small business investment company, see section 1242. For special rule for losses of a small business investment company, see section 1243. For special rule for losses on small business stock, see section 1244. amendments made by this title to subtitle A of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to income taxes) [enacting section 558 of this title and amending this section and sections 152, 166, 168, 170, 172, 213, 337, 404, 421, 535, 545, 556, 582, 611, 613, 851, 1015, 1031, 1033, 1034, 1053, 1232, 1233, 1234, 1237, 1341, and 1347 of this title] shall apply to taxable years beginning after December 31, 1953 , and ending after August 16, 1954 ; and amendments made by this title to subtitle F of such Code (relating to procedure and administration) [enacting sections 7513 and 7514 of this title and amending sections 6013, 6015, 6212, 6325, 6338, 6339, 6501, 6504, 6511, 6601, 6652, 6653, 6851, 6871, 7213, 7324, 7325, and 7422 of this title] shall take effect as of August 17, 1954 , and such subtitle, as so amended, shall apply as provided in section 7851 of the Internal Revenue Code of 1986”. For purposes of paragraph (1)(B) of section 165(h) of the Internal Revenue Code of 1986 [formerly I.R.C. 1954], adjusted gross income shall be determined without regard to the application of section 1231 of such Code to any gain or loss from an involuntary conversion of property described in subsection (c)(3) of section 165 of such Code arising from fire, storm, shipwreck, or other casualty or from theft. Section 1231 of such Code shall be applied after the application of paragraph (1) of section 165(h) of such Code.” any FSLIC assistance with respect to any loss of principal, capital, or similar amount upon the disposition of any asset shall be taken into account as compensation for such loss for purposes of section 165 of such Code, and any FSLIC assistance with respect to any debt shall be taken into account for purposes of section 166, 585, or 593 of such Code in determining whether such debt is worthless (or the extent to which such debt is worthless) and in determining the amount of any addition to a reserve for bad debts arising from the worthlessness or partial worthlessness of such debts. For purposes of this section, the term ‘FSLIC assistance’ means any assistance (or right to assistance) with respect to a domestic building and loan association (as defined in section 7701(a)(19) of such Code without regard to subparagraph (C) thereof) under section 406(f) of the National Housing Act [former 12 U.S.C. 1729(f) ] or [former] section 21A of the Federal Home Loan Bank Act [ 12 U.S.C. 1441a ] (or under any similar provision of law). The provisions of this section shall apply to taxable years ending on or after March 4, 1991 , but only with respect to FSLIC assistance not credited before March 4, 1991 . If any FSLIC assistance not credited before March 4, 1991 , is with respect to a loss sustained or charge-off in a taxable year ending before March 4, 1991 , for purposes of determining the amount of any net operating loss carryover to a taxable year ending on or after March 4, 1991 , the provisions of this section shall apply to such assistance for purposes of determining the amount of the net operating loss for the taxable year in which such loss was sustained or debt written off. Except as provided in the preceding sentence, this section shall not apply to any FSLIC assistance with respect to a loss sustained or charge-off in a taxable year ending before March 4, 1991 . The provisions of this section shall not apply to any assistance to which the amendments made by section 1401(a)(3) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 [ Pub. L. 101–73 , amending section 597 of this title and repealing provisions set out as a note under section 597 of this title ] apply.” credit or refund of any such overpayment may nevertheless be made if claim therefore [sic] is filed before the date 1 year after such date of enactment, and assessment of any such underpayment may nevertheless be made if made before the date 1 year after such date of enactment.” Subject to the modifications contained in paragraph (2), section 266 of the Economic Recovery Tax Act of 1981 [ section 266 of Pub. L. 97–34 , set out below] shall be applied as if the term ‘motor carrier operating authority’ included a bus operating authority. by substituting ‘ November 19, 1982 ’ for ‘ July 1, 1980 ’ each place it appears, and by substituting ‘November 1982’ for ‘July 1980’ in subsection (a) thereof. a certificate or permit held by a motor common or contract carrier of passengers which was issued pursuant to subchapter II of chapter 109 of title 49, United States Code, and a certificate or permit held by a motor carrier authorizing the transportation of passengers, as a common carrier, over regular routes in intrastate commerce which was issued by the appropriate State agency. Subject to the modifications contained in paragraph (2), section 266 of the Economic Recovery Tax Act of 1981 [ section 266 of Pub. L. 97–34 , set out below] shall be applied as if subsection (b) thereof contained ‘or a freight forwarder’ after ‘contract carrier of property’. the deregulation month, or at the election of the taxpayer, the 1st month of the taxpayer’s 1st taxable year beginning after the deregulation month. A motor carrier operating authority shall not be taken into account unless such authority is held by the taxpayer at the beginning of the 60-month period applicable to the taxpayer under subparagraph (A). The adjusted basis taken into account with respect to any motor carrier operating authority shall not exceed the adjusted basis of such authority as of the beginning of the 60-month period applicable to the taxpayer under subparagraph (A). For purposes of this section, the term ‘deregulation month’ means the month in which the Secretary of the Treasury or his delegate determines that a Federal law has been enacted which deregulates the freight forwarding industry. In the case of a corporation which was incorporated on December 29, 1969 , in the State of Delaware, notwithstanding any other provision of law, there shall be allowed as a deduction for the taxable year of the taxpayer beginning in 1980 an amount equal to $2,705,188 for its entire loss due to a decline in value of its motor carrier operating authority by reason of deregulation. For purposes of subsections (a) and (b), the reference to section 334(b)(2) in section 266(c)(2)(A)(ii) of the Economic Recovery Tax Act of 1981 [ section 266(c)(2)(A)(ii) of Pub. L. 97–34 , set out below] shall be a reference to such section as in effect before its repeal. Subsection (a) shall apply to taxable years ending after November 18, 1982 . If refund or credit of any overpayment of tax resulting from subsection (a) is prevented at any time on or before the date which is 1 year after the date of the enactment of this Act [ Oct. 22, 1986 ] by the operation of any law or rule of law (including res judicata), refund or credit of such overpayment (to the extent attributable to the application of such subsection) may, notwithstanding such law or rule of law, be made or allowed if claim therefore [sic] is filed on or before the date which is 18 months after such date of enactment. Subsection (b) shall apply to taxable years ending after the month preceding the deregulation month.” For purposes of chapter 1 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] [this chapter], in computing the taxable income of a taxpayer who, on July 1, 1980 , held one or more motor carrier operating authorities, an amount equal to the aggregate adjusted basis of all motor carrier operating authorities held by the taxpayer on July 1, 1980 , or acquired subsequent thereto pursuant to a binding contract in effect on July 1, 1980 , shall be allowed as a deduction ratably over a period of 60 months. Such 60-month period shall begin with the month of July 1980 (or if later, the month in which acquired), or at the election of the taxpayer, the first month of the taxpayer’s first taxable year beginning after July 1, 1980 . For purposes of this section, the term ‘motor carrier operating authority’ means a certificate or permit held by a motor common or contract carrier of property and issued pursuant to subchapter II of chapter 109 of title 49 of the United States Code. For purposes of the Internal Revenue Code of 1986, proper adjustments shall be made in the adjusted basis of any motor carrier operating authority held by the taxpayer on July 1, 1980 , for the amounts allowable as a deduction under this section. on or before July 1, 1980 (or after such date pursuant to a binding contract in effect on such date), acquired stock in a corporation which held, directly or indirectly, any motor carrier operating authority at the time of such acquisition, and would have been able to allocate to the basis of such authority that portion of the acquiring corporation’s cost basis in such stock attributable to such authority if the acquiring corporation had received such authority in the liquidation of the acquired corporation immediately following such acquisition and such allocation would have been proper under section 334(b)(2) of such Code, a noncorporate taxpayer or group of noncorporate taxpayers on or before July 1, 1980 , acquired in one purchase stock in a corporation which held, directly or indirectly, any motor carrier operating authority at the time of such acquisition, and the acquisition referred to in clause (i) would have satisfied the requirements of subparagraph (A) if the stock had been acquired by a corporation, Under regulations prescribed by the Secretary of the Treasury or his delegate, proper adjustment shall be made to the basis of the stock or other assets in the manner provided by such regulations to take into account any allocation under subparagraph (A). For purposes of section 381 of the Internal Revenue Code of 1986, any item described in this section shall be treated as an item described in subsection (c) of such section 381. The provisions of this section shall apply to taxable years ending after June 30, 1980 .” who was allowed a deduction under section 165 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (relating to losses) for a loss attributable to a disaster occurring during calendar year 1972 which was determined by the President, under section 102 of the Disaster Relief Act of 1970, to warrant disaster assistance by the Federal Government. received income in the form of cancellation of a disaster loan under section 7 of the Small Business Act [ section 636 of Title 15 , Commerce and Trade] or an emergency loan under subtitle C of the Consolidated Farm and Rural Development Act [section 1961 et seq. of Title 7, Agriculture], or received income in the form of compensation (not taken into account in computing the amount of the deduction) for such loss in settlement of any claim of the taxpayer against a person for that person’s liability in tort for the damage or destruction of that taxpayer’s property in connection with the disaster, and who elects (at such time and in such manner as the Secretary of the Treasury or his delegate may by regulations prescribe) to take the benefits of this section. the tax imposed by chapter 1 of the Internal Revenue Code of 1986 for the taxable year in which the income taken into account is received or accrued which is attributable to such income shall not exceed the additional tax under such chapter which would have been payable for the year in which the deduction for the loss was taken if such deduction had not been taken for such year, any amount of tax imposed by chapter 1 attributable to the income taken into account which, on October 1, 1975 , was unpaid may be paid in 3 equal annual installments (with the first such installment due and payable on April 15, 1977 ), and no interest on any deficiency shall be payable for any period before April 16, 1977 , to the extent such deficiency is attributable to the receipt of such compensation, and no interest on any installment referred to in paragraph (2) shall be payable for any period before the due date of such installment. in the case of an individual described in subsection (a)(2)(A), the amount of income (not in excess of $5,000) attributable to the cancellation of a disaster loan under section 7 of the Small Business Act or an emergency loan under subtitle C of the Consolidated Farm and Rural Development Act received by reason of the disaster described in subsection (a)(1), or in the case of an individual described in subsection (a)(2)(B), the amount of compensation (not in excess of $5,000) for the loss in settlement of any claim of the taxpayer against a person for that person’s liability in tort for the damage or destruction of that taxpayer’s property in connection with the disaster described in subsection (a)(1). If for the taxable year for which the deduction for the loss was taken the individual’s adjusted gross income exceeded $15,000, the $5,000 limit set forth in paragraph (1) or (2) of subsection (c) (whichever applies) shall be reduced by one dollar for each full dollar that such adjusted gross income exceeds $15,000. In the case of a married individual filing a separate return, the preceding sentence shall be applied by substituting ‘$7,500’ for ‘$15,000’. If refund or credit of any overpayment of income tax resulting from an election made under this section is prevented on the date of the enactment of this Act [ Oct. 4, 1976 ], or at any time within one year after such date, by the operation of any law, or rule of law, refund or credit of such overpayment (to the extent attributable to such election) may, nevertheless, be made or allowed if claim therefor is filed within one year after such date. If the taxpayer makes an election under this section and if assessment of any deficiency for any taxable year resulting from such election is prevented on the date of the enactment of this Act [ Oct. 4, 1976 ], or at any time within one year after such date, by the operation of any law or rule of law, such assessment (to the extent attributable to such election) may, nevertheless, be made if made within one year after such date.”