What happens to a casualty loss that is fully covered by insurance?

When a casualty loss is fully covered by insurance, the tax treatment of that loss typically results in no deduction being allowed. This is because taxpayers are not allowed to capitalize on losses that have been compensated in full by insurance. If a loss is completely covered, the taxpayer essentially has not incurred a financial loss; therefore, there is no economic detriment to offset against their income for tax purposes.

In situations where a loss has been compensated, the intent of tax deductions is to allow relief for actual losses incurred. Since the insurance payout fully reimburses the damage or loss, the taxpayer does not suffer any net loss and thus receives no tax deduction for that casualty.

This principle upholds the fundamental concept in taxation that deductions are intended to zero out the net economic impact on taxpayers, ensuring that they are only able to deduct actual losses rather than amounts reimbursed or replaced by insurance.