Problem $7-32($Algorithmic$)($LO$.1)$

Monty loaned his friend Ned $$16,000$ three years ago. Ned signed a note and made payments on the loan. Last year, when the remaining balance was $$13,600,$ Ned filed for bankruptcy and notified Monty that he would be unable to pay the balance on the loan. Monty treated the $$13,600$ as a nonbusiness bad debt. Last year, before considering the tax implications of the nonbusiness bad debt, Monty had capital gains of $$5,440$ and taxable income of $$38,500.$ During the current year, Ned paid Monty $$12,240$ in satisfaction of the debt.

Determine Monty's tax treatment for the $$12,240$ received in the current year.

The nonbusiness bad debt of $$13,600$ would have been reported as a short$-$term capital loss and $ included in Monty's gross income this year.