Nonbusiness bad debts are deducted as short-term capital losses on Federal Schedule D (Form 1040) Capital Gains and Losses. You may claim a loss from bad debt only in the year the debt becomes totally worthless. If you have a loss from a nonbusiness bad debt, you deduct it from capital gains, if any, and then up to $3,000 of other income (the TaxAct program will do that for you automatically once you have entered the bad debt amount(s) as instructed below). Any excess is deductible as a capital loss carryover in later years. You can obtain additional information in IRS Publication 550 Investment Income and Expenses (Including Capital Gains and Losses).
In the IRS Topic No. 453 Bad Debt Deduction, the IRS offers a few considerations:
To enter this information on Form 1099-B, which will transfer the data to Form 8949 and Schedule D:
The loss will be reported on Form 8949 Sales and Other Dispositions of Capital Assets and Schedule D. It will then transfer to Form 1040 U.S. Individual Income Tax Return, Line 7 (up to negative $3,000).
The TaxAct program will include the Bad Debt Statement with your electronically-filed tax return. If you file a paper return, the Bad Debt Statement will print with your return.
Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.