Question

explain the circumstances when losses incurred by individuals are deductible.

What types of losses are deductible by individuals? Are there any special circumstances or limitations that apply to deducting these losses? Give some specific examples.

Answer 1

Circumstances:

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
1.An individual's capital loss deduction is generally limited to the individual's capital gains plus USD 3,000.
2.Losses incurred by individuals that are attributable to an activity not engaged in for profit (i.e. 'hobby losses') are generally deductible only to the extent of income produced by the activity.
3.Taxpayers with net operating losses (NOLs) may carryforward and carryback their losses to certain tax years. The general NOL carryback period is the two years preceding the year the loss was incurred. If the NOL is not fully used on the carryback, the loss may be carried forward for 20 tax years following the year the loss was incurred if the loss was not fully used on the carryback.

Types Of Losses:

1.Wagering losses
Losses from wagering transactions shall be allowed only to the extent of the gains from such transactions. For purposes of the preceding sentence, in the case of taxable years beginning after December 31, 2017, and before January 1, 2026, the term “losses from wagering transactions” includes any deduction otherwise allowable under this chapter incurred in carrying on any wagering transaction.
2. 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.
3. Capital losses
Losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sections 1211 and 1212.
4. Worthless securities
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
5. Casuality Losses
(1) Dollar 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 $500 ($100 for taxable years beginning after December 31, 2009)
(2) Net casualty loss allowed only to the extent it exceeds 10 percent of adjusted gross income
(A) In generalIf 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
6.Disaster losses
(1) Election to take deduction for preceding year
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

7.Certain losses in insolvent financial institutions

Such loss if 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

Special Circumstances:

1.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.

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.

2.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.

Few Limitations are specified above in the Types of losses itself.

Examples

1.Calculating the Casualty Loss Deduction
Casualty and theft losses are limited to a $100 threshold per loss event and an overall threshold of 10 percent of your adjusted gross income. They do not include any property that is covered by insurance if the insurance company reimburses you for the loss.
Let's say that Naveen suffered two losses last year: his uninsured laptop computer was stolen and later an earthquake caused damage to his home. Each event is subject to a separate $100 limitation. If his stolen laptop was worth $1,500, we would have a loss of $1,400 after allowing for the $100 per loss threshold.
The same would apply to the damage to his home. Naveen's total casualty and theft losses are then reduced by 10 percent of his adjusted gross income after they're added together. Let's say the damage to his home reduced his property value by $10,000 and Naveen has an adjusted gross income of $30,000. The calculations would go like this:
Event 1: Stolen computer ($1,500 - $100) = $1,400
Event 2 Damaged house ($10,000 - $100) = $9,900
Total Losses ($1,400 + $9,900) = $11,300
10 Percent AGI Threshold ($30,000 AGI x 10 percent) = $3,000
Deductible Losses ($11,300 - $3,000) = $8,300

2. Capital Loss:

Losses on your investments are first used to offset capital gains of the same type. So short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain. So, for example, if you have $2,000 of short-term loss and only $1,000 of short-term gain, the net $1,000 short-term loss can be deducted against your net long-term gain (assuming you have one). If you have an overall net capital loss for the year, you can deduct up to $3,000 of that loss against other kinds of income, including your salary and interest income, for example. Any excess net capital loss can be carried over to subsequent years to be deducted against capital gains and against up to $3,000 of other kinds of income. If you use married filing separate filing status, however, the annual net capital loss deduction limit is only $1,500.