Lost in Translation

Today’s tax code contains a dizzying array of loss-limiting provisions, serving a wide range of purposes. Some are normative, such as the ban on deducting personal losses, but the vast majority are designed to prevent taxpayers from manipulating the tax rules to gain advantages tax authorities did not intend. These anti-abuse provisions can add significant complexity to the law and are often over- or under-inclusive, sometimes both at the same time. Most articles considering loss limiting provisions focus on only one or two provisions in isolation. This article takes a more comprehensive approach with two key goals. The first is to describe and categorize the different provisions to identify common abuses, key features of the tax law that create the conditions for abuse, and the different techniques used to prevent abuse. The second is to consider and suggest potential changes to these provisions to reduce complexity and improve their efficacy.