Here’s How This Tax Break For Losing Investors Is Fading Away

If you are an investor, at one point or another, you have lost money. Failure is a fact of life, and savvy investors know how to roll with the blows and learn from their mistakes. Even the most sophisticated strategy includes a few bad bets.

That said, the fear of loss is a barrier to entry for many would-be investors. That’s why in 1977 the government instituted a policy that allowed investors to deduct up to $3,000 in capital losses against ordinary income. This deduction helped incentivize people to take economically-productive risks that they might have not otherwise taken and invest their money in the markets.

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But, as Richard Rubin points out writing for Bloomberg, this is a tax break frozen in time. The deduction for capital losses is not indexed for inflation, meaning the value of its benefit erodes over time. Rubin points out that the tax break would be worth more than $10,000 if it was indexed to inflation, which is a much more significant cushion for any unlucky investor.

Tax considerations that are expressed in unchanged dollar values like this are sprinkled throughout the tax code. Similar deductions like the child tax credit remain unattached to any sort of inflation index, and have largely flown below the radar during the recent round of budget discussions.

Rubin reports that the Senate explicitly rejected increasing the limit of the capital loss deduction in 2009.

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