While I appreciate you rescuing this fish from certain death, the tank size is a big issue (assuming it's a full-grown convict). Your ammonia and nitrates are probably off because a fish of that size is producing waste faster than the filter can handle. Imagine being confined to a 2x2 box and going to the bathroom in it. It would fill up a lot faster than a 10x10 box would.
Technically, the fish doesn't need gravel or decor, as long as it has enough hiding spots to feel safe. And as long as you don't have any cats or dogs that would go poking their heads in, you could keep the tank on the floor. So if you went in this direction, you would only have to buy the tank and filter (both of which can be found pretty cheap on ebay or at local garage sales). Obviously these conditions aren't optimal to look at, but the fish really wouldn't know the difference and it would be much happier than in a cramped 10 gal.
I wouldn't call myself a fish expert, but upping the tank size should help a lot. My dad really knows his fish so I'll ask him tomorrow.