Business losses are a persistent reality and far from an insignificant economic phenomenon. They are disruptive for businesses and burdensome for tax authorities. This Article builds a theory of tax-loss-mechanism design and discusses its normative implications. Although income-tax laws in the United States and elsewhere conclusively adopt a loss-offset mechanism, economists often advocate that losses be governed by a tax-refundability regime. Tax scholars, on the other hand, largely ignore the question of the desirable tax-loss mechanism. This Article constructs and applies an economic framework for analyzing three prominent tax mechanisms for the treatment of losses: offset, refundability, and transferability. The economic theory that we develop yields several new insights and results. We show that all three tax mechanisms diverge primarily by legal design choices rather than by any inherent feature, and therefore, contrary to the common understanding in the literature, any normative choice can be implemented through any of the three, setting aside implementation costs. The commonly perceived differences among these tax mechanisms are erroneously grounded in observations of existing tax rules; this has prevented scholars from envisioning a redesign according to policy preferences. The analysis further redirects the tax-policy focus to the desirable tax-rate schedule for losses (regardless of the choice of the tax mechanism). It uncovers the endogenous tax-rate schedule that applies to losses under typical tax-treatment mechanisms. In the case of loss offset, the revealed schedule seems capricious with decreasing or cyclical tax brackets. Our analysis derives a few additional new results, which are subsequently examined in our suggested normative framework. Generally, this Article: (a) proposes a general, design-based approach to tax laws and (b) applies it to the treatment of losses, proving its value by inferring new results, which in turn (c) makes possible a broader and better-informed normative consideration for tax scholars and policymakers.