It might be. There is no specific requirement in the law that you have a written contract, but it can be very hard to prove if audited without a contract. The IRS assumes that people will handle their affairs in a businesslike manner, and will keep accurate records and documents, so not having good documentation of the loan can result in having the deduction denied if audited. Also, if you made a loan, you are required to charge interest and report and pay tax on the interest income, and even if you don't actually charge interest, you must pay income tax on the interest you would have received if you charged the federal minimum rate. Did you do that?
Then also, you can only deduct the loan once it becomes completely and finally non-collectible. Just because your friend did not pay in 2025, how do you know they could not pay something in 2026 or 2027? Have they declared personal bankruptcy? Did you attempt to join the bankruptcy as a creditor? Once you deduct a bad debt as non-collectible, you must stop all collection efforts, meaning you could not accept money from your friend in the future even if they decided to start paying you back.
And finally, the bad debt deduction is a capital loss deduction. You can deduct up to the amount of your capital gains plus $3000, and you carry the rest forward to the next year. This means that, depending on your other investments, it could take up to 8 years to fully deduct the debt, and you can be audited for up to 3 years after you file (and 6 years if the IRS alleges deliberate fraud), so this bad debt deduction could be an audit risk for as much as the next 14 years.
For the above reasons, taking a bad debt deduction for a loan to a friend is risky and difficult. You may want to consult a professional.
