The five exclusions, and the order they run in. Section 108(a)(1) removes discharge income from gross income where (A) the discharge occurs in a title 11 case, meaning a bankruptcy; (B) the taxpayer is insolvent; (C) the debt is qualified farm indebtedness; (D) for a taxpayer other than a C corporation, the debt is qualified real property business indebtedness; or (E) the debt is qualified principal residence indebtedness. Section 108(a)(2) then sequences them. A bankruptcy discharge displaces every other limb. Insolvency displaces the farm and real-property-business limbs. And the principal-residence limb displaces insolvency unless the taxpayer elects otherwise, which is a real election with real consequences and is almost never mentioned.
Insolvency is measured, not asserted, and the measurement date is precise. Section 108(d)(3) defines "insolvent" as "the excess of liabilities over the fair market value of assets", and requires that both whether the taxpayer is insolvent and the amount of the insolvency be "determined on the basis of the taxpayer's assets and liabilities immediately before the discharge". Two practical points follow. Everything owned counts on the asset side, including retirement accounts and property no creditor could have reached, which is why people who feel broke are sometimes not insolvent on this test. And section 108(a)(3) caps the exclusion at the amount of the insolvency, so a borrower insolvent by $6,000 who has $15,000 discharged excludes $6,000 and reports $9,000.
The exclusion is bought with tax attributes, and the price has a ceiling most summaries omit. Section 108(b) applies amounts excluded under limbs (A), (B) or (C) to reduce the taxpayer's tax attributes, in a fixed order set by 108(b)(2): net operating losses, then the general business credit carryover, then the minimum tax credit, then capital loss carryovers, then the basis of property, then passive activity losses and credits, then foreign tax credit carryovers. The rate is one dollar of attribute per dollar excluded, except for the credit carryovers, which are reduced by 33 and one-third cents per dollar (108(b)(3)). Section 108(b)(5) lets the taxpayer elect to apply the reduction first against the basis of depreciable property instead.
The ceiling is section 1017(b)(2). For a bankruptcy or insolvency discharge, the basis reduction "shall not exceed the excess of" the aggregate bases of property held immediately after the discharge over the aggregate liabilities held immediately after the discharge, though the statute lifts that ceiling where the taxpayer has made the 108(b)(5) election. For a taxpayer who is still deeply in debt after the discharge, that excess is often nothing, so the basis reduction is often nothing. The honest statement is therefore narrower than "the exclusion is only a deferral": the exclusion does cost future tax benefits where the taxpayer has them, and for a consumer with no carryovers and more liabilities than basis it can cost nothing at all. Section 1017(a) also puts the reduction on property held at the beginning of the following taxable year, so the effect is not felt in the year of the discharge.
The principal-residence exclusion has expired, and the way it expired matters. Section 108(a)(1)(E) reaches qualified principal residence indebtedness "which is discharged (i) before January 1, 2026, or (ii) subject to an arrangement that is entered into and evidenced in writing before January 1, 2026." The second limb survives the first: a discharge completed in 2026 under a written workout agreed in 2025 still qualifies. The IRS says the same thing in its own words in the "What's New" section of Publication 4681 (2025): "Qualified principal residence indebtedness cannot be excluded from income for discharges completed or discharge agreements entered into after December 31, 2025." Where the exclusion does apply, section 108(h)(1) reduces the basis of the residence, and 108(h)(3) withholds it where the discharge was on account of services performed for the lender or any other factor unrelated to a decline in the home's value or to the taxpayer's financial condition. The definition borrows section 163(h)(3)(B) acquisition indebtedness with "$750,000 ($375,000" substituted for "$1,000,000 ($500,000"; the statute puts no date on that substitution.
Two provisions that make income disappear without an exclusion at all. Section 108(e)(5) treats a seller's reduction of the buyer's purchase-money debt as a purchase price adjustment rather than as income, provided the reduction is not in a title 11 case and not while the purchaser is insolvent. Both negatives are load-bearing; a summary that drops them inverts the rule. And section 108(e)(2) produces no income at all "to the extent that payment of the liability would have given rise to a deduction", which is why forgiven accrued interest a taxpayer could have deducted is not income when it is written off. Form 1099-C reports interest separately in box 3 precisely so that this can be worked out.
Student loans changed for discharges after 2025, and the change should be stated as what the Code now does rather than as a universal. Section 108(f)(5) was amended generally by Public Law 119-21, section 70119(a), and the amendment applies "to discharges after December 31, 2025". The paragraph is now headed "Discharges on account of death or disability", it carries no sunset date of its own, and it adds a condition at (f)(5)(C): the exclusion does not apply "unless the taxpayer includes the taxpayer's social security number on the return of tax for such taxable year." What it replaced was a temporary rule covering discharges from 2021 through 2025. Two other limbs of section 108(f) are untouched and independent: (f)(1), which excludes forgiveness earned by working for a period in a certain profession for a certain class of employer, and (f)(4), which excludes National Health Service Corps and comparable state health-professional repayment amounts. Whether a particular 2026 forgiveness is taxable therefore depends on which provision it runs under, and the insolvency exclusion remains available on top.
Form 1099-C is a report of an event, not a determination about the reader. Under Treasury Regulation 1.6050P-1(a)(1) a discharge "is deemed to have occurred ... if and only if there has occurred an identifiable event ..., whether or not an actual discharge of indebtedness has occurred on or before the date on which the identifiable event has occurred". The same regulation adds at 1.6050P-1(a)(3) that discharged indebtedness "must be reported regardless of whether the debtor is subject to tax on the discharged debt under sections 61 and 108". There are seven identifiable events at 1.6050P-1(b)(2)(i)(A) through (G): a title 11 discharge; a cancellation that renders the debt unenforceable in a receivership, foreclosure or similar court proceeding; expiry of the statute of limitations for collection, which counts only once a debtor's limitations defense has been upheld in a final judgment and the appeal period has run (1.6050P-1(b)(2)(ii)); statutory extinguishment on a creditor's election of foreclosure remedies; unenforceability in a probate proceeding; an agreement to discharge at less than full consideration; and a creditor's decision, or the application of a defined policy, to discontinue collection and discharge the debt. That last one includes an established business practice as well as a written policy (1.6050P-1(b)(2)(iii)). Older summaries list an eighth event based on a 36-month non-payment testing period; it is not in the current regulation.
