A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. If you incurred this type of loss, you can choose one of three ways to deduct the loss.

1. As a casualty loss
2. As an ordinary loss
3. As a nonbusiness bad debt

Casualty loss or ordinary loss. You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. The choice is generally made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless.

Nonbusiness bad debt. If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the actual loss is determined before you can deduct the loss as a nonbusiness bad debt. Once you make this choice, you cannot change it without approval from the Internal Revenue Service.

How to report. The kind of deduction you choose for your loss on deposits determines how you report your loss. If you choose:

• Casualty loss--report it on Form 4684 first and then on Schedule A (Form 1040).
• Ordinary loss--report it on Schedule A (Form 1040).
• Nonbusiness bad debt--report it on Schedule D (Form 1040).

More information. For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the instructions for Form 4684.

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