If you’ve been burned after lending money to a friend or family member who didn’t pay you back, take heart: You may be able to deduct your loss. For federal income tax purposes, certain personal loans you make that aren’t repaid are classified as short-term capital losses. You can use the losses to offset short-term capital gains that would otherwise be taxed at high rates. Any remaining net short-term capital losses can offset any net long-term capital gains. To qualify for such deductions, you should be able to show your loan wasn’t intended to be a gift. This means the loan’s terms must be in writing and you must charge interest that’s at least equal to the applicable federal rate.
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