A cash-basis taxpayer made a bona fide, nonbusiness loan to an acquaintance in year 1. At the end of year 2, it is determined that the taxpayer will likely be able to collect only 20% of the principal, and no interest has been or will be collected. How should the loss be treated for tax purposes in year 2

Based on the information given How the loss will be treated for tax purposes in year 2 is that the LOSS amount will NOT be deductible in Year 2 reason been that tax payer can only collect the deduction in bad debt in the year the bad debt has no real value and become un-useful.

Secondly the tax payer should not wait till the debt is due before knowing whether the bad debt has no real value reason been that bad debt will has no real value when there is no hope that the debt amount that is owed will be paid which is why to a limited extent a non business bad debt that has no real value will not be deductible.

Therefore How the loss will be treated for tax purposes in year 2 is that None of the loss amount in year 2 will be deductible