Cancellation Of Debt - COD

First you receive the good news that your credit card debt or part of your mortgage has been forgiven and you no longer have to make any payments. Then the bad news arrives. The amount forgiven is taxable. According to the IRS, a cancellation of debt (COD) is taxable income even though you didn't receive actual cash. You would receive a Form 1099-C, Cancellation of Debt from the lender or whoever forgave your debt, and this amount will be reported to the IRS.

Let's say Frank could no longer make mortgage payments on his loan, so it is foreclosed by the bank. Frank bought the house for $100,000 and made $5,000 worth of principal payments, but today the house is only worth $80,000. So Frank will receive a Cancellation of Debt Form 1099-C from the bank for $80,000 that he needs to report as income on his taxes.