As noted, you may be able to offset the bad debt against the capital gain, however, we don't have sufficient facts to make that determination.
You need to consider the following:
- A nonbusiness bad debt must be totally worthless to take a deduction
- Is this loan to a related person? If so, this will bring more scrutiny by the IRS
- While you don't need to go to court and get a judgement, you will need to show that you have taken reasonable steps to collect the debt. These should be documented and will be asked for should you be audited.
- You will need to be able to show that this is a bona fide debt and one arising from a debtor-creditor relationship.
- You must be able to show there was intent of the parties at the time of transfer to create a debtor-creditor relationship. Was there a true expectation of repayment?
- While a formal written agreement is not necessary, having this will add credence to the fact that this was intended to be a formal debtor-creditor relationship.
- The timing of the worthlessness is key. You need to take the loss (worthless bad debt) deduction in the year it becomes worthless based on the discussion above. So if you "may" receive some payment in 2022, then you would not be able to take a worthless bad debt deduction in 2021. You will have the burden of proof to show that the debt became worthless in 2021 to be able to take the deduction.
*A reminder that posts in a forum such as this do not constitute tax advice.
Also keep in mind the date of replies, as tax law changes.
