In 2013 I obtained a judgment of $21,000 for a non-business loan that was in default. After a failed attempt to collect, I wrote it off as a non-business bad debt and reported it as a short-term capital loss. In 2021 through a new collection effort, I was able to reach a settlement with the debtor for $29,000 because the debt had appreciated (Minnesota District Court uses 4% annually for judgments). I plan to report the $21,000 as a short term capital gain because it is a recovered non-business bad debt. I have two questions:
- Can I subtract legal fees of $3000 for the collection attorney from the $21,000 and report the remainder as a short-term capital gain?
- Do I have to report the additional $8000 ($29,000-$21,000) as income? Judgments are generally not taxed. Interest is taxed.
