Under what circumstance is canceled debt usually reportable as income?

Canceled debt is typically reportable as income when the lender forgives the debt. This scenario occurs because, under tax law, when a lender cancels or forgives a debt, the borrower is effectively receiving a financial benefit equivalent to the amount of the forgiven debt, which the IRS views as taxable income. The rationale is that the borrower no longer has to repay the amount and thus effectively gains that amount of money, which should be reflected in their income for tax purposes.

In contrast, paying off a loan early does not involve forgiveness; the debt is simply settled as originally agreed. Choosing not to use funds also does not play into debt cancellation from a taxation standpoint, as no debt has been eliminated. Selling a capital asset does not relate directly to debt forgiveness unless there are specific provisions or transactions involving that asset and the associated debt, which are not generally considered under standard cancellation rules.