Final answer:
A denied capital loss refers to a situation where tax authorities disallow a taxpayer's claimed loss on an investment, usually due to a wash sale or transactions lacking economic substance or intended for tax evasion, resulting in a potential increase in tax liability.
Step-by-step explanation:
A denied capital loss occurs when a taxpayer's claim of a loss on an investment is disallowed by tax authorities. This often happens if the claim does not meet certain conditions set forth by the tax code. For instance, if a security is sold at a loss and the same or substantially identical security is repurchased within 30 days before or after the sale, this is known as a wash sale, and the capital loss from the transaction cannot be claimed for tax purposes.
Furthermore, capital losses may be denied if the transaction is deemed to lack economic substance or if it's solely intended for tax evasion. In the context of the United States, the Internal Revenue Service (IRS) outlines specific regulations that determine the eligibility of capital loss deductions.
It's critical for taxpayers to be well-informed about these rules to avoid having their capital loss denied, which would prevent them from offsetting any capital gains and could result in a higher tax liability.