While interest on municipal bonds is tax free for federal income tax purposes, gain or loss on the sale of the bonds must be reported. The loss is treated as a capital loss, which is deductible within capital loss rules. That is, the loss can fully offset gains. Then, up to $3,000 of losses can be used to offset ordinary income ($1,500 for those who are married filing separately). Any excess capital loss can be carried forward to the following year.
Casualty losses such as from a storm, in areas declared by the President to warrant federal assistance. An election may be made to deduct the loss in the year before the loss or the year of the loss.