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Capitol Loss Deduction: Should it Reflect Inflation?

Over the years, the Internal Revenue Code has adjusted for inflation of many different tax incentives to help individuals cope with the negative effects of inflation. Congress selects these provisions and the annual change is driven by the consumer price index. One provision that has not changed is the capital loss deduction.

The capital loss deduction was established in 1976 and allows for a maximum of $3,000 in capital loss deduction each year, and has not changed since it was introduced. There are numerous reasons to explain why there is a cap on the amount of deductions, but it comes down to taxpayers being able to write off all losses, retaining the gain assets and defer taxation by selling them later. It would dramatically decrease the amount in federal tax revenue.

By using the consumer price index inflation calculator, in 2002, the maximum deduction would be around $9,500. Today the deduction maximum would be around $12,000, and if it was tied to inflation the maximum would continue to rise. This would eventually open up the opportunity for people to deduct all losses, or even sell at a loss and retain gained assets, which would defer taxation. This would greatly reduce the amount of federal tax revenue.

So what does this mean for taxpayers? Well, it means at this time, that the highest amount able to be deducted is $3,000. Anything over $3,000 that does not offset capital gains or deducted can be carried over to the next year. Many people argue that this system is has eroded the value of the deduction. However, the real question is can there be a regulation that would increase the amount deducted without undermining the amount of federal tax revenue?

Here at Crowley & Halloran CPA’s, our consultants would be happy to help you plan and manage your business budget. Click here to request a proposal.