Form 1099-C: Is Cancelled Debt Taxable? (Insolvency Calculator)
Updated · Reviewed by Deepak Middha, Chartered Accountant
The short answer
Usually, yes — cancelled debt is taxable income. It is not taxable to the extent you were insolvent (your debts exceeded what you owned) just before the cancellation, or if it was discharged in bankruptcy, or under the IRS’s other exclusions for farm debt and business real property. You claim any exclusion on Form 982. Mortgage debt on your main home forgiven after 2025 no longer qualifies.
Insolvency calculator: how much of your 1099-C is taxable?
You were insolvent by $20,000, which covers the whole canceled amount, so none of it is taxable.
What to do next: attach Form 982 to your return, check line 1b, enter $15,000 on line 2, and complete Part II to reduce tax attributes. Then see what it does to your refund with the refund estimator.
Key takeaways
- Lenders send Form 1099-C when they cancel $600 or more of a debt, whether or not it turns out to be taxable to you.
- Insolvency is measured immediately before the cancellation: total debts minus the market value of everything you own.
- You exclude the smaller of the canceled amount or the amount you were insolvent by; the rest is ordinary income.
- The home-mortgage exclusion ended for discharges and agreements after December 31, 2025.
- Every exclusion is claimed on Form 982, and most require you to reduce tax attributes in its Part II.
What is a 1099-C, and why did you get one?
A lender that is an applicable entity — a bank, credit union, federal agency, or any organization for which lending money is a significant business — files Form 1099-C when it cancels $600 or more of a debt and an “identifiable event” occurs, such as a settlement for less than you owed, the statute of limitations on collection running out, a creditor’s decision to stop collecting, or a bankruptcy discharge. Box 2 shows the amount canceled and box 6 shows the reason code. The IRS receives a copy.
The American Rescue Plan rule that made most student loan discharges nontaxable covered discharges in 2021 through 2025. For discharges after December 31, 2025, Publication 4681 lists only the specific student loan exclusions, and the death or disability exclusion requires a valid SSN on the return. Some debts are not income at all under the exceptions in Publication 4681:
- Debt canceled as a gift, bequest, devise or inheritance
- Certain student loan cancellations — for meeting work requirements, repayment assistance programs, or death or total and permanent disability of the student (after 2025 this needs an SSN valid for employment on the return)
- Debt whose payment would have been deductible (for example a cash-method business expense)
- A price reduction by the seller after purchase, when you aren't insolvent or in bankruptcy (reduce your basis instead)
1099-A vs 1099-C: foreclosure and repossession
| Form 1099-A | Form 1099-C | |
|---|---|---|
| Reports | The lender acquired property securing your loan, or knows you abandoned it | The lender canceled $600 or more of a debt |
| Typical cause | Foreclosure, repossession, abandonment | Settlement, write-off, bankruptcy, foreclosure shortfall forgiven |
| What you figure | Gain or loss on the property, as if you sold it | Whether the canceled amount is income or excluded |
| Both in one year? | The lender can send a single 1099-C instead | Boxes 4, 5 and 7 then carry the property details |
A foreclosure on your home can produce both a gain or loss on the sale and canceled debt. For the sale side, including the home-sale exclusion, see sold your home; other forms you may need are in the IRS forms hub.
S corporations: cancelled debt on Form 1120-S
The Instructions for Form 1120-S (2025), under Income, say: if the corporation has had debt discharged resulting from a title 11 bankruptcy proceeding or while insolvent, see Form 982 and Publication 908, Bankruptcy Tax Guide. The exclusions work differently for a corporation and its shareholders than for an individual, so treat this as a pointer, not a method. For S corporation basics, see the Form 2553 guide.
Frequently asked questions
What is a 1099-C?
Form 1099-C, Cancellation of Debt, is the form a lender — a bank, credit union, federal agency or other business that lends money — sends when it cancels $600 or more of a debt you owe. A copy goes to the IRS. It tells you the amount forgiven, which is generally taxable income unless an exception or exclusion such as insolvency applies.
Is cancelled debt on a 1099-C taxable?
Usually, yes. The IRS treats forgiven debt as ordinary income, reported on Schedule 1 of Form 1040. It is not taxable to the extent you were insolvent just before the cancellation, if it was discharged in a title 11 bankruptcy case, or if another exclusion or exception applies — for example certain student loan discharges, qualified farm debt, or a debt canceled as a gift.
How do I calculate insolvency for Form 982?
Add up everything you owed immediately before the cancellation, including the canceled debt, and everything you owned at fair market value, including retirement accounts and assets creditors cannot reach. If debts exceed assets, you were insolvent by the difference. You exclude the smaller of the canceled amount or that difference, checking line 1b of Form 982 and entering the amount on line 2.
What is Form 982 used for?
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness, is how you tell the IRS that some or all canceled debt is excluded from income — line 1a for bankruptcy, 1b for insolvency, 1c for qualified farm debt, 1d for qualified real property business debt. Part II then reduces tax attributes such as loss carryovers, credits and the basis of your assets.
What is the difference between a 1099-A and a 1099-C?
Form 1099-A, Acquisition or Abandonment of Secured Property, reports that a lender took back property securing a loan — through foreclosure or repossession — or learned you abandoned it. It gives you what you need to figure gain or loss. Form 1099-C reports debt the lender canceled. If both happen in the same year, the lender may send only a 1099-C covering both.
Where does an S corporation show cancellation of debt income on Form 1120-S?
The Form 1120-S instructions do not give a dedicated line for excluded canceled debt. Under Income, they tell a corporation whose debt was discharged in a title 11 bankruptcy or while insolvent to see Form 982 and Publication 908, Bankruptcy Tax Guide. Because S corporation rules differ from individual ones, have a tax professional apply them to your return.
- IRS Publication 4681 (2025) — Canceled Debts, Foreclosures, Repossessions, and Abandonments →
- IRS — Instructions for Forms 1099-A and 1099-C (04/2025) →
- IRS — About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness →
- IRS — Instructions for Form 1120-S (2025) →
- IRS Publication 908 — Bankruptcy Tax Guide →