The IRS states that if you lent someone money with the expectation of them paying you back, but they fail to repay you, you may be able to write off the unpaid amount as a nonbusiness bad debt on your tax return.
What Form Do I Need to File?
To claim a nonbusiness bad debt with the IRS, you will need to complete Form 8949 and attach it to your personal tax return. Form 8949 is where you report the sale or exchange of capital assets.
In addition to Form 8949, you also must attach a written statement to your tax return that includes these three details:
- The amount of money owed to you and the original due date for repayment
- The name of the person who owes you money and their relationship to you
- The efforts you made to try to recover the money owed and why you have basically given up on ever getting it back
For example, let's say I loaned my mother $20 to buy some grocery items on November 1st, 2022. She said she would repay me on her next paycheck on November 15th.
When she failed to repay me over a week later, I called her on November 30th to ask about the unpaid loan. She dismissively told me to stop calling about the "funky little money" she owes me - making it clear I'll never get the $20 back.
In this case, I would report the $20 bad debt to the IRS by listing details of the scenario on Form 8949 and including that written statement as described above with my overall tax return.
Reporting Bad Debts to the IRS
While no one hopes to deal with a situation where personal loans go unpaid, you may have options through claiming nonbusiness bad debt with the IRS if you can demonstrate you realistically will not be paid back. Just be sure to carefully document the loan terms and attempts to recover amounts owed. Please consult a tax professional for guidance on your specific situation.