Recovery of bad debt

[VPBC1]

Where to report recovery of bad debt which is being written off on Schedule D as a capital loss over the years and now has been partially recovered?

[BobKamman]

So this was a nonbusiness bad debt that someone figured was totally worthless, which proved to be wrong.  Stop claiming it on Schedule D until it really does turn out to be worthless.  Should amended returns be filed for those years when the $3,000 (or greater amount, if applied against capital gains) was claimed?  That's a good question. Anyone?

[dkh]

Disclaimer - my method may not be the "correct" way to handle.

I had client with same situation - I reduced the capital loss carryforward by amount received.  

If you don't have any capital loss carryforward, couldn't you report as Capital gain in the year received?

[taxiowa]

I am not sure you would break even doing it DKH way.  You save at ordinary income tax rate with $3,000 capital loss per year.  Then you turn around and pay income tax at the capital gain rate when you add the $3,000 or entire amount back as taxable capital gain.  IMO doesn't seem fair to replace ordinary loss with capital gain if you are correcting something.

[sjrcpa]

Recoveries of bad debts are reported in the same manner as the deduction. So if the bad debt was a short term capital loss the recovery is a short term capital gain.

[PATAX]

Sjr hit the nail on the head...