What is classified as a casualty loss?

A casualty loss is specifically defined under tax law as a loss that results from a sudden, unexpected, or unusual event, such as a natural disaster. This includes damages caused by events like hurricanes, floods, earthquakes, and fires. When a taxpayer experiences property damage due to such events, they may be eligible to claim the loss on their tax return.

The context of why this classification is important lies in the fact that casualty losses can provide a significant tax benefit, as taxpayers can deduct them from their taxable income, subject to certain limitations. This deduction is crucial for providing relief to those affected by unforeseen disasters.

In contrast, a loss from theft, while it might seem similar, falls under different provisions, and an ordinary business loss does not qualify as a casualty loss under the same criteria. Moreover, losses from market declines in the value of investments, like stocks, do not qualify as casualty losses since they are not the result of a sudden event impacting the physical property, but rather market fluctuations.