What is a loss on deposits?

A loss on deposits is where a bank or some other financial institute goes bankrupt or otherwise becomes insolvent, leading to the loss of funds you had deposited with that financial institute. If such a loss occurs, you can deduct it as a non-business bad debt. You would do this by deducting the loss from any capital gains you had. If you had no capital gains, or if the loss was greater than your capital gains, you can only deduct a maximum of $3,000 of the loss - the remaining loss must be carried over into a future tax return. Alternatively, you can deduct the loss on deposits as a casualty loss. While this avoids the $3,000 limit, it does make the deduction subject to the $100 and 10% limits.

You may be able to avoid these various limits by deducting your loss on deposits as a miscellaneous deduction. If the amount of your loss on deposits, when added with any other miscellaneous deductions, is more than 2% of your adjusted gross income, it makes sense to go this route, as you will not have to worry about the $3,000 limit on capital gains losses, or the $100 and 10% limits on casualty losses.