This Article examines the effects of the income tax rules as they relate to losses from terrorist attacks. It shows that the income tax system affords victims of terrorism a form of implicit insurance because the amount of tax owed decreases proportionately with the amount of the loss. The Article argues that the level of insurance should be greater for victims of terrorism than that provided to those who suffer other kinds of losses. Granting special tax benefits to victims of terrorist attacks provides behavioral incentives, not only for individuals and businesses who have suffered or might potentially suffer losses from terrorist attacks, but also for the government. The Article argues that, while the Victims of Terrorism Tax Relief Act of 2001 grants special tax benefits to victims of terrorism, this type of relief should be codified and should apply to all victims of terrorism against the United States, rather than granted on an ad hoc basis. Further, additional rules should be adopted which grant tax benefits to companies which provide insurance against terrorist attacks and favorable tax treatment should be given to expenses for the private provision of security against such attacks.