Losses are deductible up to the amount of "adjusted basis" (this term is discussed below under "Sales and Exchanges"). However, individuals cannot deduct losses unless they are either:
(1) incurred in a trade or business,
(2) incurred in a transaction entered into for profit,
(3) arising from fire, storm, shipwreck or other casualty, or
(4) from theft.
Deductible losses do not include losses from the sale of capital assets, like stocks and other investment securities. Those are capital losses to which special rules apply.
Casualty losses are subject to certain limitations. First, the first $100 of each loss is not deductible. Second, all net casualty losses are deductible only if they exceed 10% of the taxpayer’s adjusted gross income (which is income before itemized deductions and exemptions). There are special rules for disaster losses. The purposes of these limitations is to limit casualty losses to those that are substantial for the particular taxpayer.
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