Turn Unpaid Loans into Tax Benefits
Did you lend money personally that was never repaid? U.S. tax law allows you to deduct that loss as a short-term capital loss. Use this interactive guide to check your eligibility and calculate your potential tax benefits.
4-Step Eligibility Quiz
Assess your situation based on the four key IRS requirements.
1/4: Was it a 'bona fide debt' with legal validity?
(Transactions between family/friends must be proven not to be gifts)
2/4: Did the debt become 'completely' worthless?
(You cannot deduct a partially worthless debt)
3/4: Was it a 'nonbusiness' debt, unrelated to your trade or business?
4/4: Did the debt become worthless 'this year'?
(You must claim the deduction in the year the loss occurred)
Tax Benefit Calculator
Enter the uncollectible loan principal to see your potential tax benefits.
How to File: Form 8949 Guide
Bad debt must be reported as a short-term capital loss on Form 8949 as shown below.
Form 8949, Part I (Short-Term)
Important: When you file, you must attach a separate statement to your return explaining the details for item (a): the debtor's name, the nature of the debt, and why it became worthless.
Prepare for IRS Audits: Required Documentation Checklist
Thoroughly prepare and keep these documents to prove your eligibility for the deduction.
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Promissory Note
A written contract specifying the loan amount, interest rate, and repayment schedule.
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Financial Transaction Records
Bank transfer statements or canceled checks showing the loan was made.
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Proof of Collection Efforts
Emails, text messages, or certified mail records requesting repayment.
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Proof of Worthlessness
The debtor's bankruptcy notice, a court judgment, or a report from a collection agency showing the recovery effort failed.