Question: I made a loan to a relative that will never be repaid. Can I take a deduction for this bad debt on my tax return?
Answer: Your loss might qualify as a nonbusiness (personal) bad debt deduction.
You can take a tax deduction for a nonbusiness bad debt only in the year it becomes worthless and only as a short-term capital loss. In addition, you must be able to prove that a bona fide debt existed and that you’ve made efforts to collect the debt.