REG Property and Losses · Updated November 2026
Business Bad Debt or Nonbusiness Bad Debt: Why Does the Character Matter?
The same economic loss can receive very different tax treatment depending on whether the debt was business or nonbusiness.
Bona fide debt
First determine whether a genuine debtor-creditor relationship existed rather than a gift or equity contribution.
Business bad debt
A debt closely connected with the taxpayer's trade or business can qualify for business bad-debt treatment.
Nonbusiness bad debt
A nonbusiness bad debt generally receives short-term capital-loss treatment when it becomes wholly worthless.
Partial worthlessness
The rules for partially worthless debt differ between business and nonbusiness debt, making classification important.
The takeaway
Business bad debts can receive ordinary-loss treatment under applicable rules. Nonbusiness bad debts generally become short-term capital losses when wholly worthless.
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FAQ
Is every unpaid personal loan an ordinary deduction?
No.
Can nonbusiness bad debt be a short-term capital loss?
Yes.
Does a bona fide debt need to exist first?
Yes.