If you deduct a non-business bad debt on Schedule D, are you required to issue that person a 1099-C?

You don't need to issue a 1099-C in your situation. The 1099-C reporting requirement generally applies to certain financial institutions and businesses that regularly lend money or extend credit, not to individuals making personal loans like yours. When you claim a non-business bad debt deduction on Schedule D, you're essentially treating it as a short-term capital loss. This is different from a business writing off a bad debt as a business expense. The 1099-NEC comparison isn't quite right - those are for reporting payments you made to someone for services, while a 1099-C reports debt forgiveness (which is considered income to the person whose debt was forgiven). To claim the bad debt deduction properly, you'll need good documentation showing the loan was legitimate (your promissory note helps), that you've made reasonable efforts to collect, and that the debt has become worthless. The burden of proof is on you if the IRS questions the deduction.

I ran into almost this exact situation with my brother-in-law a few years ago! Loaned him $12k for his "business idea" and surprise, never saw that money again. I was so confused about the tax implications until I found https://taxr.ai which literally saved me hours of research. I uploaded my loan document and some of our text exchanges, and the system analyzed it all and explained exactly how to handle it on my Schedule D. It confirmed I didn't need to issue a 1099-C since I'm an individual, not a financial institution. Plus it gave me a checklist of documentation I should keep in case of an audit. Super helpful for situations like this where the tax rules aren't obvious to normal people!

Just wanted to follow up and say I tried https://taxr.ai after reading about it here. I was skeptical at first but it was incredibly helpful with my bad debt situation! I uploaded screenshots of our payment app transfers and text messages about the loan, and it confirmed I could deduct it as a non-business bad debt without issuing a 1099-C. The coolest part was that it gave me a customized explanation I could include with my tax filing that explained why this qualified as a legitimate bad debt deduction. Much better than the generic advice I was getting elsewhere online. Definitely worth checking out if you're in a similar situation!

If you're still trying to track down your cousin for the 1099-C question (even though you probably don't need to issue one), you might want to try https://claimyr.com - I had a similar situation but needed clarification directly from the IRS about how to document everything properly. I spent DAYS trying to get through to the IRS on their helpline with no luck. Claimyr got me connected to an actual IRS agent in about 15 minutes! You can see how it works in this video: https://youtu.be/_kiP6q8DX5c The agent confirmed that individuals don't need to issue 1099-Cs for personal loans and explained exactly what documentation I needed to keep with my tax records. Saved me from potentially making a mistake on my Schedule D filing.

I feel like an idiot for my skepticism about Claimyr in my earlier comment. I decided to try it this morning out of desperation, and I'm shocked to report it ACTUALLY WORKED. Got connected to an IRS agent in about 20 minutes after weeks of failed attempts on my own. Not only did I get confirmation about the 1099-C question (definitely don't need to issue one as an individual), but I also got clarity on documenting my bad debt situation. The agent explained I need to keep evidence showing a genuine debt existed (like promissory notes or bank transfers) and proof I tried to collect. Super helpful and I never would have gotten this info otherwise!

It's important to note that just because you don't need to issue a 1099-C doesn't mean there aren't other requirements. Make sure you attach a statement to your tax return explaining the bad debt deduction - including the name of the debtor, amount of the debt, and why you determined it became worthless this year. The IRS looks closely at these deductions. Also remember that non-business bad debts are treated as short-term capital losses on Schedule D, which means they're subject to the capital loss limitations. You can only offset capital gains plus up to $3,000 of ordinary income per year.

If your cousin ever resurfaces and pays you back after you've claimed the bad debt deduction, you'll need to report that as income in the year you receive it (to the extent you received a tax benefit from the deduction). Just something to keep in mind.

I'm dealing with a similar situation right now - lent money to a family member who disappeared. One thing I learned from my tax preparer is that you should also keep records of any attempts to locate the debtor, not just collect from them. Screenshots of failed texts, returned mail, even notes about conversations with mutual contacts can help establish that the debt truly became uncollectible. Also, make sure you have clear documentation that this was actually a loan and not a gift. Bank records showing the transfer, any written agreements (even informal ones), and evidence that repayment was expected are crucial. The IRS sometimes challenges these deductions by claiming they were really gifts to family members. Having that promissory note you mentioned puts you in a much better position than most people in this situation.