Loren loaned a friend $9,000 as financing for a new business venture. In the cur

Question

Loren loaned a friend $9,000 as financing for a new business venture. In the current year, Loren's friend declares bankruptcy and the debt is considered totally worthless. What amount may Loren deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?

a. $9,000 ordinary loss
b. $9,000 short-term capital loss
c. $3,000 short-term capital loss
d. $3,000 ordinary loss
e. $6,000 short-term capital loss
f. $6,000 ordinary loss

Explanation / Answer

When the person earned 9000 he would have paid taxes for it. As the 9000 is a loss now because he loaned to his friend and his friend filing bankruptcy, that would be a short term capital loss for him. Hence, it would be a 9000 short term capital loss for him.

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