Bad debt exactly the same as a short term capital loss?

[Frustrated]

I just read Topic 453 - Bad Debt Deduction; but have some questions.

I lent money to someone several years ago and it just definitively became worth nothing. (there was some collateral that took some time to dispose of) As I read 453 it is a short term capital loss entered on 8949, rather than a deduction (as I expected). Is that correct?

What do I put on 8949 for dates? If I put the real dates, it will be a long term loss, so I guess I have to put something else in, but 453 doesn't say what.

Thanks.

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[Mark Freeland]

On 8/18/2016 11:36 PM, Frustrated wrote:
> I just read Topic 453 - Bad Debt Deduction; but have some questions.
>
> I lent money to someone several years ago and it just definitively
> became worth nothing. (there was some collateral that took some time
> to dispose of) As I read 453 it is a short term capital loss
> entered on 8949, rather than a deduction (as I expected).
> Is that correct?
>
> What do I put on 8949 for dates? If I put the real dates, it will
> be a long term loss, so I guess I have to put something else in,
> but 453 doesn't say what.
>
> Thanks.
>

By "definition", the loss is a short term loss, regardless of the dates.
Somewhat like selling inherited property is a long term event,
regardless of the holding period. The loss goes on Form 8949 in Part I
(short term loss), and you check box C (no associated 1099-B).

The acquisition date is effectively cosmetic, while the disposition date
must be the date the debt became worthless, and not when you decided to
take the loss.

IRS Pub 550 is emphatic on that point:
"You can take a bad debt deduction only in the year the debt becomes
worthless"
https://www.irs.gov/publications/p550/ch04.html#en_US_2015_publink100010565

[Frustrated]

On Thursday, August 18, 2016 at 11:40:36 PM UTC-4, Frustrated wrote:
> I just read Topic 453 - Bad Debt Deduction; but have some questions.
>
> I lent money to someone several years ago and it just definitively became worth nothing. (there was some collateral that took some time to dispose of) As I read 453 it is a short term capital loss entered on 8949, rather than a deduction (as I expected). Is that correct?
>
> What do I put on 8949 for dates? If I put the real dates, it will be a long term loss, so I guess I have to put something else in, but 453 doesn't say what.
>
> Thanks.
>
> --

One more thing... If I have been paid back 1/3rd, do I say I invested 2/3rd and can't collect any, or that I invested 3/3rds and can't collect 2/3rds?

[Arthur Rubin]

On Friday, September 16, 2016 at 1:03:32 PM UTC-7, Frustrated wrote:

> One more thing... If I have been paid back 1/3rd, do I say I invested 2/3rd and can't collect any, or that I invested 3/3rds and can't collect 2/3rds?

It's the former; the latter would cause the return to be flagged. You can only claim a bad debt deduction when the debt becomes totally worthless; if it is still worth something (anything), you cannot claim the loss.

Arthur Rubin, CRTP, AFSP, Brea, CA