Dealing with a bad debt...

I lent someone's LLC $25,000 18 years ago. He gave me $35,000 of gems in collateral, and a jeweler I knew was to sell them off to pay back the debt. For 3 years it went well; she sold a quarter of the gems at the appraised value and felt she could sell the rest over time, but her business went south and her ability to sell gems ended. In the interim, the LLC went under and the two principles disappeared.
I tried everything, but it turns out they are only worth the appraised value if a jeweler actually need such a gem for something they are making. Otherwise they are worth ten cents on the dollar. I hadn't understood that.
I finally got lucky and found an auction house that sold them for about a third the appraised value, which beats the heck out of a tenth.
So I am ready to claim my loss on a bad debt; about $7,000 of the $25,000. How do I go about claiming my loss. Years ago I had a similar loss and simply listed it on schedule d as a long term loss, and the IRS seemed happy with that (or perhaps the didn't even notice it). Is that proper, or is there more to it.
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I think you have to make a further effort to collect the debt to claim a bad debt deduction as a long term capital loss, although, if the principles disappeared, you may have done everything you need to.
If it was a non-recourse debt, it's a simple capital loss; the basis for the gems is the amount of the debt, and you've sold them at a loss.
-- Arthur Rubin Brea, CA
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Arthur Rubin

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