Three years ago, Geraldine bought a Kandinsky for her art...

Three years ago, Geraldine bought a Kandinsky for her art collection from a mail-order advertisement for $$\$ 310,000$$. This year, Geraldine's art dealer told her that the painting was actually painted by Kansky and is not worth more than $$\$ 310$$. What is her deductible loss upon discovery of the forgery?

Key Concepts

Cost Basis

The cost basis is the original value or purchase price of an asset used to determine the gain or loss upon its sale or disposition. In tax matters, knowing the cost basis is fundamental because it forms the starting point for calculating any potential taxable loss or gain when the asset’s value changes over time.

Realization Principle

The realization principle states that income or loss is not recognized for tax purposes until a transaction occurs that results in a sale, exchange, or other disposition of an asset. This means that merely discovering a decrease in the value of an asset does not trigger a deductible loss unless the asset is sold or otherwise disposed of.

Capital Loss Deduction

Capital loss deductions allow taxpayers to offset their capital gains and, in some cases, a limited amount of ordinary income. However, such losses must be realized through a transaction; unrealized losses or losses associated with personal-use property typically do not qualify for a tax deduction.

Personal-Use Property Loss Non-Deductibility

For assets held for personal use, such as items in a private art collection, tax law generally disallows deductions for losses. Even if an asset’s value sharply declines or it turns out to be a forgery, if it is personal-use property, the loss is not deductible because it is not incurred in a bona fide investment or business transaction.

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