What to do with a loan to you that has gone bad? Question: I made a loan to a relative that will never be repaid. Can I take a deduction for this bad debt on my tax return? Answer: Your loss might qualify as a nonbusiness (personal) bad debt deduction. You can take a tax deduction for a nonbusiness bad debt only in the year it becomes worthless and only as a short-term capital loss. In addition, you must be able to prove that a bona fide debt existed and that you've made efforts to collect the debt. IMPORTANT NOTICE To ensure compliance with Treasury Department regulations, we advise you that, unless otherwise expressly indicated, any federal tax advice contained in this message was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state or local tax law provisions or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.
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