Jake loaned his cousin, Arnold, $10,000 in March 2018 to open a cybercafe in Santa Barbara. Arnold signed a loan agreement to pay Jake 7 percent interest annually, with the principal due in 2021. Jake received his 2018 interest payment but did not receive any interest payment in 2019. In March 2020, Jake’s father informs him that his cousin has filed for bankruptcy.

Identify the tax issue(s) posed by the facts presented. Determine the possible tax consequences of each issue that you identify.