It also explains why getting a loan is not considered income, because it will be paid back. The interest you pay is income for the entity issuing the loan.
If that entity now "forgives" the debt, it now becomes income for the borrower. They could presumably file a "loss" for the interest they will now not be getting.
Did I get that right?
This would also mean this kind of open a possibility of tax fraud. Companies issuing "loans" to employees, instead of paying salaries. I am sure IRS has something against that as well.
Pretty much. If you went to the bank and they gave you $10,000 and you never had to repay it, then it is income.
I experienced it when I got some restricted stock (not an option but you can't sell it right way) when my company was acquired in the dot.com boom. I also got a "loan" to pay the taxes. The idea was that when the stock was available to sell, you could sell enough to pay tax on the loan forgiveness and keep the rest. (yes it was kind of convoluted but such were the times). Long story short, stock that was worth $35 in 1999 was worth $0.66 in 2001. Kinda bites big time. And yes you can take the loss, but only up to $3,000 and carry the rest forward to the next year. I believe that last year was the first year I didn't have any dot.com losses I could claim any more on my taxes :-).
It also explains why getting a loan is not considered income, because it will be paid back. The interest you pay is income for the entity issuing the loan.
If that entity now "forgives" the debt, it now becomes income for the borrower. They could presumably file a "loss" for the interest they will now not be getting.
Did I get that right?
This would also mean this kind of open a possibility of tax fraud. Companies issuing "loans" to employees, instead of paying salaries. I am sure IRS has something against that as well.