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A nonbusiness bad debt is treated as a short-term capital loss.
A. True
B. False

User DBUK
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1 Answer

2 votes

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.

User Inactivist
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