Can I deduct a loss? I loaned my brother $35,000 for bail & attorney fees. He signed a Promissory Note. He declared Bankruptcy after paying back $17,000.

Possibly. You can’t deduct a theft loss, but you can deduct a non-business bad loan.  (We will assume this is a bad loan for the rest of this discussion. One of the things that could make it theft is if there was evidence that your brother intended from the beginning to never repay you, and it was always a scam.)

 

To deduct a non-business bad loan, you must first be able to show that the money was a loan, and not a gift. Did you have a written loan agreement? Did you charge interest? If you charged interest, did you report the interest that you received as taxable income on prior tax returns?

 

Next, you must make a reasonable effort to collect the debt, and you must exhaust all reasonable efforts to collect the debt, and you must show the debt is uncollectible.  Do you have proof that you made collection efforts? Is your brother‘s situation such that there is no reasonable hope of collecting money in the future?

Then, non-business bad debts are reported on the TurboTax income page in the investment section, yes, this is a little strange. A bad debt is treated as an investment which had a purchase price (in your case) of $18,000 and a selling price of zero dollars, creating an investment loss.  Your loss will offset any capital gains you have from other investments this year and you can deduct a further $3000 of the loss against your other income. Any remaining loss will be carried forward into the future and can be used up against future capital gains.

 

Once you have declared a non-business bad debt on your tax return, you are not supposed to make further collection efforts because you have declared it to be unrecoverable. If you do collect further funds, that will be taxable in the future.

Your audit risk would be in showing that it was a legitimate and businesslike loan, and that you have no reasonable hope of making further collections. This can be hard to do in the case of loans to family members, so it will depend on what kind of proof you can show.

Yes.  According to the IRS, "You may take the deduction only in the year the debt becomes worthless. You don't have to wait until a debt is due to determine that it's worthless. Report a non-business bad debt as a short-term capital loss on Form 8949, Sales and Other Dispositions of Capital Assets.  You will report that in the same section in which you report stock and other investment sales.  To enter:

 

• Type "Investment sales" in the search window and click Enter
• Click on "Jump to Investment sales"
• On the page with "Did you have investment income in 2022?"  Answer Yes
• On the page with "Did you have crypto income in 2022?" Answer No (you can revisit this section later if the answer is Yes).  Then click on Continue
• On the page with "Let's import your tax info" click on "Enter a different way"
• Select "Other" to "OK, let's start with one investment type?" and click Continue
• Enter the name of the person of your brother
• On the page with "Now, enter one sale for __________".
• Indicate "How did you receive this investment?
• Enter the details of the sale, and the interview will walk you through entering the details of the sale