Deduct when it becomes worthless
Keep in mind, it is not necessary for you to wait until the loan becomes worthless for you to deduct it on your tax return. The IRS will allow you to deduct it in the year it becomes worthless. For example, if you know you have no real chance of ever getting your hard-earned money back, consider taking this nonbusiness bad debt deduction this tax season.
If you find that you do have a nonbusiness bad debt, report it on your tax return as a short-term capital gain. The IRS requires you to attach a statement with a description of the debt, the relationship, and any efforts you have made to attempt to get your hard-earned cash back! For more information to see whether you qualify for this deduction, visit the IRS website and refer to Publication 550, Investment Income and Expenses.