Nonbusiness Bad Debts 

   If someone owes you money that you cannot collect, you have a bad debt. You
   may be able to deduct the amount owed to you when you figure your tax for the
   year the debt becomes worthless. 

   There are two kinds of bad debts -- business bad debts and nonbusiness bad
   debts. A business bad debt, generally, is one that comes from operating your trade
   or business. All other bad debts are nonbusiness bad debts and are deductible as
   short-term capital losses. 

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   Nonbusiness Bad Debts 

   If someone owes you money that you cannot collect, you have a bad debt. You
   may be able to deduct the amount owed to you when you figure your tax for the
   year the debt becomes worthless. A debt must be genuine for you to deduct a loss.
   A debt is genuine if it arises from a debtor-creditor relationship based on a valid
   and enforceable obligation to repay a fixed or determinable sum of money. 

   Bad debts that you did not get in the course of operating your trade or business are
   nonbusiness bad debts. To be deductible, nonbusiness bad debts must be totally
   worthless. You cannot deduct a partially worthless nonbusiness debt. 

   Basis in bad debt required. To deduct a bad debt, you must have a basis in it --
   that is, you must have already included the amount in your income or loaned out
   your cash. For example, you cannot claim a bad debt deduction for court-ordered
   child support not paid to you by your former spouse. If you are a cash-basis
   taxpayer (most individuals are), you cannot take a bad debt deduction for expected
   income such as unpaid salaries, wages, rents, fees, interest, and dividends unless
   you have previously included the amount in your income.