Ellen loans Nicole $45,000 to start a hair salon. Unfortunately, the business fails in 2019 and she is unable to pay back Ellen. In 2019, Ellen also had $20,000 of income from her part-time job and $15,000 of capital gain from the sale of stock. How much of the $45,000 bad debt can Ellen claim as a capital loss in 2019?

Question

Quizplus · Accepted Answer

Ellen can claim the $45,000 bad debt as a capital loss on her tax return. Since she also had $15,000 of capital gain in 2019, she can use the capital loss to offset the capital gain dollar for dollar. This leaves $30,000 of capital loss unused. Ellen can use $3,000 of the unused capital loss to offset her ordinary income of $20,000, leaving $27,000 of unused capital loss to carry forward to future tax years. Therefore, the amount of the $45,000 bad debt that Ellen can claim as a capital loss in 2019 is $18,000 ($15,000 to offset the capital gain and $3,000 to offset ordinary income), with $27,000 carried forward to 2020.

Ellen Loans Nicole $45,000 to Start a Hair Salon