If there are any losses left, deduct them from long-term capital gains. If there are still more losses left, you can take that amount to future years. If someone owes you money that you can't collect, you may have a bad debt. For a discussion of what constitutes valid debt, see Publication 550, Investment Income and Expenses and Publication 535, Business Expenses.
In general, to deduct a bad debt, you must have previously included the amount in your income or have lent your cash. If you are a cash taxpayer (most people are), you usually cannot take a deduction for bad debts for unpaid wages, salaries, rent, fees, interest, dividends, and similar items. For a bad debt, you must show that at the time of the transaction you intended to make a loan and not a donation. If you lend money to a family member or friend with the understanding that the family member or friend may not return it, you should consider it as a gift and not as a loan, and you cannot deduct it as a bad debt.
You can't usually deduct a bad debt deduction from your regular income, at least not right away. It is a short-term capital loss, so you must first deduct it from any short-term capital gains you have before deducting it from long-term capital gains. Non-commercial bad debts are deductible in the year they lose their value. If you do not deduct a bad debt on your original return during the year it ceases to have value, you can file a claim for credit or repayment because of the bad debt.
You must file within 7 years of the date you had to file your original return for that year. Interest paid on personal loans is not tax-deductible. If you apply for a loan to buy a car for personal use or to cover other personal expenses, the interest you pay on that loan does not reduce your tax liability. Likewise, interest paid on credit card balances is also not usually tax-deductible.
You must also be able and willing to prove that the loan was not a gift. According to the IRS, “If you lend money to a family member or friend with the understanding that the family member or friend may not return it, you should consider it as a gift and not as a loan, and you can't deduct it as a bad debt. If you take steps to get a personal loan paid and there is no reasonable expectation that your money will be repaid, you can report it as a bad debt. We made Pigeon Loans to prepare ourselves for situations like this because no one wants to be left with bad debts or a tense friendship ????.
In general terms, a bad debt is a loan that was made with the intention of being repaid but that is now uncollectible. If you use it for both personal and business purposes, you can deduct interest on the loan proportional to the amount of time you use the vehicle for business. If you lend money from your personal bank account to a family member and he or she never reimburses it to you, it is a non-commercial bad debt. Mortgage interest, for example, is only deductible if the loan was taken out to finance the purchase of a primary residence.
There are several ways to address unpaid loans or bad debts, including the cancellation of these items and their deduction from taxes. For student loan interest to be tax-deductible, the loan must have been taken out by the person, their spouse, or a dependent. Once a personal loan in tax terminology becomes a bad debt, you can legally declare a loss of short-term capital in that year. You must have lent cash to someone who doesn't return it to get a deduction for non-business bad debts.
Let's say you've given up receiving a loan payment and decided to take a tax deduction for a non-commercial bad debt. This is where you can share documentation about the loan agreement, your contact efforts and the borrower's inability to pay. However, there is an important exception when a taxpayer makes an unfortunate loan to their employer that results in a loss of bad debts from the company. You can show that the beneficiary of your loan cannot return your money by showing bank statements or bankruptcy statements (if applicable).