Final answer:
Jerry may be able to claim a bad debt deduction if he proves the loan is worthless and he made reasonable attempts to collect the debt before the bankruptcy. The deduction would be classified as a non-business bad debt and treated as a short-term capital loss on his tax return.
Step-by-step explanation:
When Jerry loans his best friend Todd $2,000 and Todd declares bankruptcy, the question is whether Jerry can take a bad debt deduction. Generally, for tax purposes, non-business bad debt can only be deducted if it's totally worthless and classified as a short-term capital loss. The loan was personal, so it would be considered a non-business bad debt. To claim the deduction, Jerry would need to prove the loan is uncollectible and that he took reasonable steps to collect the debt before Todd filed for bankruptcy.
In summary, under IRS rules, if Jerry can demonstrate that he made a genuine loan to Todd that has become completely uncollectible due to the bankruptcy, he may indeed be eligible for a bad debt deduction on his tax return. A critical aspect that shapes Jerry's ability to take the deduction will be his documentation of the loan and the steps taken to collect the debt.