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In 2011 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2012 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year.

The result is:

A) Grace deducts a business bad debt of $12,000 in 2012.

B) Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2012.

C) Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2012 and carries $9,000 over to subsequent years.

D) Grace deducts a business bad debt of $3,000 in 2012 and carries $9,000 over to subsequent years.

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