The loan is without a note or any paper work, it was invested and lost completely to a privately owned co. The stock was in my name and an LLC managed by me. There was no income or capitol gain from the investment.
26 U.S. Code § 61 - Gross income defined
(a) General definition
Except as otherwise provided in this subtitle, gross income means all income from whatever source derived, including (but not limited to) the following items:
(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;
(2) Gross income derived from business;
(3) Gains derived from dealings in property;
(8) Alimony and separate maintenance payments;
(10) Income from life insurance and endowment contracts;
(12) Income from discharge of indebtedness;
(13) Distributive share of partnership gross income;
(14) Income in respect of a decedent; and
(15) Income from an interest in an estate or trust.
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Even though you have not paid the loan back, it is not necessarily cancellation of indebtedness income. Your friend could theoretically take collection actions against you. You should talk to a tax attorney to review the situation.
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If your friend forgives the loan then yes, at that point the forgiven debt would, generally speaking, constitute taxable income to you (although there are some exceptions). However, your friend would have to actually forgive the debt; it's not enough that you just haven't repaid it.
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Yes, you are at risk of cancellation of indebtedness income on this loan, regardless of the fact it was poorly documented. However, the tax treatment of this money to both you and the lender is complex and depends upon whether the money would be regarded as an equity investment or a loan and who or what the money was invested in. You should consult a competent tax adviser.
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