Amid the recession's body-slam on stock-market prices, Sen. Orrin Hatch has introduced a bill to increase significantly the amount of capital losses that individual taxpayers may deduct in a year.

The bill, which Hatch is pushing with Sen. Blanche Lincoln, D-Ark., would allow deducting $10,000 in such losses against ordinary income, up from the current $3,000 limit. The new $10,000 limit would then also be increased each year automatically to match inflation.

To understand the bill, it helps to remember that investors may receive ordinary income on assets, such as dividends and interest. They also may have capital gains if they sell their stocks or bonds for more than they paid for them. A capitol loss occurs when people sell their investments for less than they paid originally.

Capital losses now can be offset against capital gains without limit. However, current law limits the amount of capital loss that can be deducted against ordinary income to $3,000 a year.

Unused capital losses can be carried over to future years indefinitely, where they can be used against future capital gains or to offset, again, up to $3,000 in ordinary income a year in the future.

"This is a question of fairness," Hatch said. "Allowing individual investors to deduct only $3,000 per year when their total losses may come to many times that much is simply not fair. The tax code taxes gains without limit, so it should not place such a restrictive limitation on losses."

Hatch added, "One constituent with $60,000 in losses told me that unless he lives to age 90, he would not be able to claim his losses. This is not right, and it is time we did something about it."

Hatch also noted that the $3,000 limitation has been in place since 1978. "Had this limitation been indexed for inflation back in 1978, the $3,000 limit would instead now be about $9,700," he said.