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Discussion
As a general rule, any loss sustained in a business or other
profit-seeking activity by a taxpayer during the taxable year for
which the taxpayer is not compensated by insurance or otherwise
is allowed as a deduction in calculating the taxpayer’s taxable
income. Sec. 165(a). However, losses from sales or exchanges of
capital assets are allowed only to the extent allowed in sections
1211 and 1212. Sec. 165(f). Section 1211(b) places limitations
on the allowability of capital losses for individuals as follows:
SEC. 1211(b). Other Taxpayers.--In the case of a
taxpayer other than a corporation, losses from sales or
exchanges of capital assets shall be allowed only to
the extent of the gains from such sales or exchanges,
plus (if such losses exceed such gains) the lower of–-
(1) $3,000 * * *, or
(2) the excess of such losses over such
gains.
If capital losses exceed capital gains by more than $3,000, the
excess may be carried forward to later taxable years. Sec.
1212(b). Section 172 permits a deduction in a current year for
the full amount of net operating loss carrybacks or carryovers
from previous years, as long as taxable income for the current
year is not less than zero. Sec. 172(a), (b)(2). However, net
capital losses that are carried forward may be deducted only in
later tax years subject to the limitations of section 1211(b),
which allows capital losses only to the extent of capital gains,
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Last modified: May 25, 2011