Q – A few years ago, my brother got himself into financial difficulties and I loaned him $10,000. He has been unable to pay me back, and I have decided to forgive the loan and write it off when I file my taxes. How do I report the loss on my tax return?
A – Non-business bad debts are reported on Form 8949 (for Schedule D) as a short-term capital loss. The information required includes the name of the debtor. The reason the lender is allowed to claim a loss on such a loan is that a forgiven debt constitutes income to the debtor, thereby balancing the tax scale.
In your case, unfortunately, you cannot write off the $10,000. To be deductible, a non-business bad debt must be an enforceable debt and you, as the lender, must make reasonable efforts to collect on that debt. Such efforts to collect include legal action. If you decide to forgive your brother’s debt, the loss is nondeductible, as it is essentially a gift to him.