Business bad debts give rise to ordinary losses, while nonbusiness bad debts
give rise to short-term capital losses (Secs.
Two conditions must be met to deduct nonbusiness bad debts
The IRS argued that these were nonbusiness bad debts
Taxpayers must treat nonbusiness bad debts
as losses from the sale or exchange of a short-term capital asset and can deduct the debt only for the year in which the debt becomes wholly worthless.
Individual taxpayers may deduct two different types of bad debts: business bad debts, which are deductible as ordinary losses if completely or partially worthless, and nonbusiness bad debts
, which are short-term capital losses taken only when entirely worthless.
Business bad debts result in ordinary losses; nonbusiness bad debts
result in short-term capital losses.
This is typically preferable to the tax treatment of nonbusiness bad debts
, which are deductible as a short-term capital loss in the year the debt becomes totally worthless.
166(d) provides that noncorporate taxpayers can claim short-term capital losses for nonbusiness bad debts
For individual taxpayers, bad debts are either (1) business bad debts, deductible as ordinary losses, or (2) nonbusiness bad debts
, deductible as capital losses.
For noncorporate taxpayers, however, this allowance is qualified; losses attributable to nonbusiness bad debts
are treated as resulting from the sale or exchange of capital assets held for not more than one year (i.
The Tax Court held that the doctor was an investor, not a professional money lender; thus, the losses were nonbusiness bad debts
and short-term capital losses.
Business bad debts that are completely or partially worthless are deductible as ordinary losses, while nonbusiness bad debts
are short-term capital losses only when entirely worthless.