Final answer:
The statement that a nonbusiness bad debt is treated as a short-term capital loss is true. Such debts, when declared as worthless, are considered short-term capital losses for tax purposes.
Step-by-step explanation:
A nonbusiness bad debt is indeed treated as a short-term capital loss for tax purposes. According to the IRS guidelines, if you lend money to a borrower who ends up defaulting, and the loan was intended to be a bona fide loan rather than a gift, and it becomes wholly worthless, you can declare it as a nonbusiness bad debt.
The classification of this type of debt is specifically as a short-term capital loss, regardless of how long the loan was outstanding before it became worthless.
Bad debt refers to money that is unlikely to be recovered from a borrower or debtor. In financial accounting, bad debt arises when a debtor is unable or unwilling to fulfill their debt obligations, making it doubtful that the amount owed will be repaid.
This situation commonly occurs when a debtor defaults on a loan or credit agreement, leading the lender or creditor to categorize the debt as uncollectible.
Therefore,the statement is true.