Can a Personal Loan Be Considered a Capital Loss at Tax Time?

If you loan someone money as part of your business and don't get paid back, you can claim the debt as a business loss. When you loan money to a friend or a parent, you may be able to write off the debt, but it's harder. If you claim the deduction, it will be a short-term capital loss.

Income

In general, making a personal loan to someone doesn't give you a deduction, because you're supposed to get the money back. Most unpaid debts aren't deductible either. If someone owes you unpaid wages or spousal support, you can't get a tax write-off for them. Making a loan from your personal funds and never getting repaid is one of the few ways to get a personal debt deduction, if it meets the IRS requirements.

Not Debts

If the IRS asks questions, you have to show that the debt was for a genuine loan. You gave it to someone with an agreement or an understanding he'd pay you back, not as a gift, so you have a creditor/debtor relationship. In some cases, you shouldn't even try making a case. Loaning your 16-year-old money for a prom gown, for instance, won't give you a bad debt write-off. Loans to minor children never do.

Worthless

You can't write off a personal loan until the debt is completely worthless. If you loan out $2,000, say, you can't deduct it if you expect to get some of it back. You usually have to make reasonable attempts to collect before you can take a deduction. You do not have to wait until the debt is due if it becomes uncollectible sooner, for example because the debtor filed bankruptcy.

Claiming the Loss

You write off a personal bad debt in the tax year you realize you're not getting the money back. Report it on Form 8949 as a short-term capital loss. You deduct such losses against short-term capital gain before you subtract them from any other income. For each bad debt, attach a statement telling the amount of the debt, the date it came due, the debtor's name and your relationship. Detail your efforts to collect the money and the reasons you think the debt is worthless.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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