Non-business bad debts are treated as short-term capital losses. In order to be deductible, they must be totally worthless. The debt must be genuine – there must be a valid and enforceable obligation to pay a certain amount of money. And you must have a basis in the debt; that is, it must have been made from money you already included in your income, or that you loaned out of your cash.
You can report a loss for a non-business bad debt when it becomes worthless. You do not have to wait until the debt becomes due in order to determine it is worthless. You must show that you have taken reasonable steps to collect the debt.
Short-term or Long-term Capital Gain or Loss
Once you have identified the capital gains and losses on personal and investment assets that you need to report on Schedule D, you must then separate them into short-term and long-term capital gains or losses.
You do this based on how long you held, or owned the property. If you held the asset for one year or less, the gain or loss is short-term, and if you held the asset for more than one year, the gain or loss is long-term. The holding period starts the day after your received the property and includes the day you sold or disposed of it. If you acquired the property by inheritance, any gain or loss is long-term regardless of how long you held the property.
If you have long-term gains and losses, you must identify your 28% rate gains and losses. And, if you end up with a net capital gain, you must also identify your qualified 5-year gain and any unrecaptured section 1250 gain.
28% Rate Gains
The 28% rate applies to “collectibles” gains from the sale or trade of works of art, antiques, metals such as gold and silver, gems, stamps, and coins.
Qualified 5-Year Gains
If you have a gain on the sale of qualified small business stock that you held for more than 5 years, you can exclude half the gain from your income, and the other half is subject to the 28% rate.
Section 1250 Gains
Generally, when you sell real property, the part of your gain that corresponds to depreciation is recaptured. You would use the Unrecaptured Section 1250 Gain Worksheet in the Schedule D instructions to figure the tax on this part of your gain.
Partnership Interests
If you sell or dispose of an interest in a partnership, you may have ordinary income, collectibles gain taxed at 28%, or unrecaptured section 1250 gain. These should be reported on the Schedule K-1 you receive from the partnership.