What is the At-Risk Rule?

The at-risk rule is a rule used in taxation to prohibit an investor from claiming or deducting more losses than have actually incurred. In the tax law, only the actual amount of risks and losses is deductible or can be claimed by an investor. The at-risk rule also limits the amount an investor can deduct from their taxable income, according to this rule, investors can only deduct the amount they invested from their taxable income.

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How Does the At Risk Rule Work?

Investors claim losses on a business or investment to reduce their tax liability. Door to the tendency of some investors to deduct more than they invested or the losses incurred, the at-risk rule was created. This rule made impossible for investors to claim an amount that exceeds the losses deductible. It is also contained in the tax code that investors must have risk in an investment before losses can be deducted. The at-risk rule can be found in Section 465 of the Internal Revenue Code (IRC), this rule ensures that losses claimed by investors are valid. Hence, investors cannot deduct more than they actually invested in a business. The at-risk rule also applies to individual taxpayers, this rule states that a taxpayer can only deduct amounts up to the at-risk limitations in any given tax year.