Get your taxes done using TurboTax
You were in the correct spot - Investment Income, Stocks, Mutual Funds, Bonds, Other. When you go through that section and answer the questions, TurboTax automatically creates Form 8949 and includes it with your tax return. Answer NO to the 'Did you receive a 1099-B for this sale'. The cost (basis) is the amount of your worthless loan and the proceeds are what you have received on the loan, $0. The description should have the name of the debtor/loan info. Date Sold is the day it become worthless, must be in 2021 to file on this year's return.
Be sure to mark the Holding Period as Box C - SHORT TERM, see image below
The debt must have been a bona fide loan—you gave the money with every expectation of being repaid. If you charged interest, and the borrower signed a promissory note, this provides a good indication that you expected to get your money back. Otherwise, the IRS might consider the exchange to be a gift, particularly if the borrower is a friend or a family member. And gifts aren't tax deductible.
The debt must be worthless
The unpaid debt must be 100% worthless before you can deduct it. There must be no chance that the borrower can or will ever pay you back the amount of the loan. It is important to make a documented effort to collect your money with:
- Letters
- Invoices
- Phone calls
Generally, you can't take a deduction for a bad debt from your regular income, at least not right away. It's 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. Finally, you can deduct up to $3,000 of any remaining balance from other income. If a balance still remains, you can carry it over to subsequent years.
The IRS also requires that you attach a bad-debt statement to your tax return, explaining the details of the loan you made. This can prevent e-filing as attachments cannot be e-filed with your return.
