There is a significant difference between how you would handle a personal loan that was defaulted or an investment that is now worthless. You can deduct a worthless personal loan as a non-business bad debt as an itemized deduction on schedule A. You would deduct a worthless investment as a capital loss on schedule D. A bad debt is fully deductible in the year it occurs, but only if your other itemized deductions are already more than the standard deduction. A schedule D capital loss is deductible against schedule D capital gains. If you have no capital gains, then you can only deduct $3000 of the loss this year, but the remaining amount carries forward until you use it up.
If you already itemize your deductions, the bad debt treatment gives you the full deduction all at once, and is often more favorable. However, it will almost certainly cause the IRS to take a second look at your tax return. You will need extensive documentation that this was a bona fide loan that was handled in a businesslike manner and that you made diligent efforts to collect on the loan. If anything about the paperwork looks like an investment and you are audited, the IRS will almost certainly change the treatment of the loss to a schedule D capital loss.
