When is a loss “sustained”?

When the transaction closes and the amount is fixed — the sale settles, the business folds, the debt goes provably worthless. Paper declines in value you still hold are not losses; §165 needs a completed event.

Can I deduct a personal casualty loss?

Only from a federally declared disaster, and only the slice above $100 per event plus 10% of AGI. A burst pipe in an ordinary storm: no deduction. The same pipe in a declared hurricane zone: measure it.

What proof does a loss deduction need?

Basis records showing what you had in it, documents proving the closing event, and appraisals for casualty amounts. Losses are among the most examined deductions — the file should survive an audit on its own.

IRC §165 · 26 U.S.C. §165

IRC §165: Loss Deduction

Name: IRC §165: Loss Deduction in 36 seconds
Uploaded: 2026-09-20
Duration: 36 s
Description: IRC §165 allows the loss deduction — business, investment, and disaster-area casualty losses, sustained and provable. No deduction without basis, a closed transaction, and paper.

By Paul D. Diaz, EA, MBA · Updated September 20, 2026

IRC §165 allows the loss deduction — business, investment, and disaster-area casualty losses, sustained and provable. No deduction without basis, a closed transaction, and paper.

Watch: Section 165 in 36 seconds.

What it governs

Business and investment losses: deductible when sustained in a closed transaction
Personal casualty losses only in federally declared disasters — $100 per event plus 10% of AGI
Worthless securities and bad debts have their own timing and character rules
Basis caps every loss — you cannot deduct more than you had in it

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Questions this section answers

When is a loss “sustained”?: When the transaction closes and the amount is fixed — the sale settles, the business folds, the debt goes provably worthless. Paper declines in value you still hold are not losses; §165 needs a completed event.
Can I deduct a personal casualty loss?: Only from a federally declared disaster, and only the slice above $100 per event plus 10% of AGI. A burst pipe in an ordinary storm: no deduction. The same pipe in a declared hurricane zone: measure it.
What proof does a loss deduction need?: Basis records showing what you had in it, documents proving the closing event, and appraisals for casualty amounts. Losses are among the most examined deductions — the file should survive an audit on its own.

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