You're telling me there's a painless way to lose money? Well, no. But given most of us have red ink flowing from our investments, it's better to consider how best to handle them than to turn ostrich and pretend it's not happening. The principal at Argyle Lawyers, Peter Bobbin, has been pondering the implications of losses for a tax forum on February 10 and says increasing insurance cover is an issue.

"A lot of [investors] need life insurance now merely because their assets have been wiped out," he says. "If you look at investors with Storm, not only have they lost their investments but many borrowed to invest and have lost even more, so their level of financial security is non-existent."

Bobbin says investors with big losses should consider immediately lifting the level of life insurance they have through their super fund, where premiums are cheaper and, because they're paid from your super, they won't drain much-needed cash flow.

Even if most of your assets are still intact, says Bobbin, your insurance may need to be increased to make up for any investment losses. This is especially pertinent where investors have assumed they will be able to cope with unexpected events - such as death or disability - by drawing on liquid investments.

Depending on your circumstances, Bobbin says, it may be possible to claim any realised capital losses as a deduction against your other income.

How does that work? Bobbin says it depends on whether your investments are held as capital or revenue. Capital losses are subject to the capital gains tax regime and can only be used to offset capital gains. In this grim environment, you may not be able to use your losses and will be forced to carry them forward. Losses on investments that are treated as revenue, however, form part of your income tax assessment, according to Bobbin. They can be used to reduce your tax liability on other income.

What's the difference? Bobbin says it all depends on what your intentions were when you bought the investments. If it is clear you bought with the intention of reselling at a profit, you may be able to treat any profits and losses as revenue. But there's a catch. If you hold investments on revenue accounts, you are taxed on any profits as normal income - which means you miss out on the 50 per cent capital gains tax discount that applies to gains made on investments held for 12 months or more.

Bobbin says you can't cherry-pick which method to use. If you've been merrily claiming the tax discount on capital gains made through the boom, it would be a bit disingenuous to now claim your losses as revenue. But Bobbin says if you "borrowed a motza in 2007, put it into the market and lost it and you don't have a history of declaring capital gains, you're in an easier position, provided you can demonstrate the requisite purpose."

Bobbin says the tax office makes a clear distinction between profit-making schemes and capital investments. Share traders have their gains and losses taxed as income, whereas shareholders are subject to the capital gains tax rules. A share trader is someone who carries out business activities to earn income from buying and selling shares, whereas a shareholder holds shares for the purpose of earning income.

Relevant matters include the nature, regularity, volume and repetition of the share activity; the amount of capital employed; and whether your activities are conducted in a business-like manner.

Bobbin says you don't have to actively trade shares (or other investments) to have gains and losses treated as revenue but you do need proof you bought the shares with the express intention of reselling them at a profit. The best counsel is to seek specific tax advice if you are uncertain.

What if I can't claim the losses as income? We'll look at that next week.

For more information on the education tax refund (Money, January 28), contact the tax office on 13 28 61. You can order a copy of the refund form on 1300 720 092.