Note: this article is general information only and is not tax advice. Always confirm your specific situation with a CPA or tax attorney.
Selling a debt for less than its face value has tax consequences — generally reasonable and often favorable to the seller. Here are the key points in the United States.
Businesses: the bad-debt deduction
If you sell a $10,000 receivable for $6,000, you crystallize a $4,000 loss. For a business that reports on the accrual basis and already included the income, a genuine, arm's-length sale generally supports a business bad-debt deduction as an ordinary loss. The IRS covers the rules in IRS Publication 535 (Business Expenses).
A sale to an independent third party objectively documents the impairment of the receivable — often more persuasive to the IRS than an internal write-off that leaves the account on your books.
Business vs. non-business bad debt
The distinction matters. A business bad debt is generally deductible as an ordinary loss, while a non-business bad debt (for example, a personal loan to a friend) is treated as a short-term capital loss and is only deductible when it becomes totally worthless. Cash-basis taxpayers generally cannot deduct amounts never reported as income.
Individuals
For an individual selling a private receivable, the difference between the sale price and the amount lent is generally a capital loss, subject to the short-term capital loss rules for non-business bad debts. Keep the loan agreement and the assignment as evidence of both the loan and the loss.
For the buyer
The buyer is taxed only when they collect more than they paid: that spread is income or gain. Until they collect, there is no taxable profit. This mirrors the discount logic that makes the market work.
Keep clean records
- The original invoice, note or contract establishing the amount owed.
- Evidence you tried to collect (demand letters, emails).
- The signed assignment agreement showing the sale price.
Practical summary
Selling an uncollectable debt does more than raise cash: it lets you document the loss for tax purposes and close the file. Debtalia is a marketplace that connects you directly with buyers, with no commission on the sale — coordinate the timing with your tax advisor to make the most of the deduction.
