How to Deal with a Convertible Note Default

[Sandy26]

Hi Everyone,

I have a client who unfortunately became the Lender of $20k in the form of a Convertible Note to a Petroleum Corp (Borrower) who was drilling for oil. The Petroleum Corp went belly up and my client lost all of his $20k. Would this loss be recorded on Schedule D with the Convertible Note being treated as an Asset with a Cost Basis of $20k and Sales Price of $0? Would the date of sale be considered to be when the Note becomes completely worthless? If yes, what is required to be done for a Note to be considered completely worthless? If this is not the correct method for reporting this loss, how should this loss be reported?

Thanks in advance for your help!

[Bees Knees]

That is how I would treat it.

As to what you need to prove it is worthless, TTB, page 8-6 says:

Nonbusiness bad debt. To be deductible, nonbusiness bad debts
must be totally worthless. A partly worthless nonbusiness debt
is not deductible. It is not necessary to go to court to determine a
debt is worthless if the taxpayer can show that a judgment from
the court would be uncollectible. A taxpayer must only show that
reasonable steps have been taken to collect the debt.