Question

A taxpayer loaned $2,000 to her best friend in 2016. The friend filed for bankruptcy in 2017 at which time the taxpayer was told to expect to receive $.60 on the dollar on this personal loan. On February 2, 2018, the taxpayer received a final settlement of $950. How much can the taxpayer deduct in 2017 and 2018, and how will the loss be treated on the return?

		2017: $800 short-term capital loss; 2018: $250 short-term capital loss
		2017: $0; 2018: $1,050 short-term capital loss
		2017: $800 long-term capital loss; 2018: $250 long-term capital loss
		2017: $0; 2018: $1,050 long-term capital loss
		None of the above

Answer 1

At 0.60 to a dollar, the person can expect to recover only $ 1200 (0.6 * 2000) on the loan extended by her. Hence in 2017, when she was informed about the payback terms, she should record the $ 800 as loss. We are not given any dates, but only going by the years, since it is more than 1 year we consider and file this loss as long term loss. In 2018, when the final payment is less than the expected payment by $ 250, this additional amount should be recorded as long term loss in 2018.

Hence answer is 2017: $ 800 long term capital loss; 2018: $ 250 long term capital loss