In 2018, Jasmin loaned her friend Janelle $5,000 to invest in various stocks.Janelle signed a note to repay the principal with interest.In 2019, Janelle made risky stock investments and incurred large losses.In late 2019, Janelle declared personal bankruptcy and Jasmin was unable to collect any of her loan.Jasmin had no other gains or losses in 2018 or 2019.Her income from wages in both 2018 and 2019 was $50,000.The result is:

Question

Quizplus · Accepted Answer

Jasmin's loan to Janelle is considered a personal loan, not related to Jasmin's trade or business. Therefore, the loss from this loan is treated as a nonbusiness bad debt, which is reported as a short-term capital loss. The IRS allows individuals to deduct capital losses up to $3,000 per year against ordinary income, with any excess carried over to subsequent years. Hence, Jasmin can deduct $3,000 in 2019 and carry over the remaining $2,000 to future years.

In 2018, Jasmin Loaned Her Friend Janelle $5,000 to Invest