Updated. I’ve gotten a few tax-filing questions regarding P2P lenders Prosper Lending and Lending Club. For tax year 2013, LendingClub provided individual investors extra guidance with their Tax Guide for Retail Investors [pdf]. Using this information, I have updated this post.
Don’t file too early. My first recommendation is to not print out or download any of your 1099s until mid-March. Both Prosper and LendingClub seem to regularly issue corrected and/or amended 1099 forms with new numbers late in February. If you already printed them out earlier, go back and make sure they haven’t been changed. After having to file an amended return a few years ago, I always wait until after mid-March to gather all my tax documents.
Where to find your tax documents. I don’t think either Prosper or Lendingclub sends you 1099 forms in the mail. The easiest way for me to direct you to these documents is for you to cut-and-paste the following URLs into your web browser and then log into your accounts. Here are screenshots of what the pages should look like for Prosper and LendingClub.
https://www.prosper.com/secure/account/common/statements.aspx
https://www.lendingclub.com/account/taxDocuments.action
Tax disclaimer. I am not a tax professional. The following is based on my best attempt at understanding the fuzzy world of P2P lending taxes. I am simply sharing how I’m going to do my personal tax return, but you should consult a tax professional for an expert opinion. You may not get all or most of these forms.
LendingClub
LendingClub 1099-OID. OID stands for original issue discount. The total of Box 1 is basically what LendingClub is reporting as the interest earned on your loans, net of fees. This interest should be reported on Schedule B and taxed as ordinary interest income (similar to interest from bank accounts).
LendingClub 1099-B (Recoveries for Charge-offs). If you had any loans charged-off*, but they still recovered some money later on, that will be reported here. It should be broken down into either short-term or long-term capital gains. Because it already tells me short-term or long-term, I will simply report the totals with acquisition and sell date(s) as “various”.
LendingClub 1099-B (Folio secondary market). If you sold any loans on the secondary Folio market, then the sales should be reported here. It should also be broken down into either short-term or long-term gains or losses. I will simply report the totals on Schedule D, using my acquisition and sell date(s) as “various”.
LendingClub 1099-MISC. I would just type this form into TurboTax box-by-box or submit directly to your accountant, usually under “Other Income”. Box 7 amounts will be subject to self-employment taxes, Box 3 amounts will not.
Prosper Lending
Prosper 1099-OID. Similar story to the LendingClub 1099-OID above, except they just give you the total from all your loans. Again, I have all zeros except for Box 1, which I will report as ordinary interest income on Schedule B.
Prosper 1099-B (Recoveries for Charge-offs). Again, anything listed here should be broken down into either short-term or long-term capital gains/losses and recorded on Schedule D. Prosper includes loan charge-offs on this form.
Prosper 1099-B (Folio secondary market). Again, anything listed here should also be broken down into either short-term or long-term gains or losses.
Prosper 1099-MISC. I would just type this form into TurboTax box-by-box or submit directly to your accountant, and it should be pretty straightforward. Box 7 amounts will be subject to self-employment taxes, Box 3 amounts will not.
*Reporting Charge-offs
If you have loans that were charged-off in 2013 (loan is very late and attempts to collect have failed, so they give up), you can write them off as a non-business bad debt. You can find these in either your year-end statements (LendingClub) or your 1099-B form (Prosper). These are all treated as short-term capital losses, which you can use to offset short-term capital gains from other investments or you can deduct against up to $3,000 in ordinary income per year (with the balance carrying forward to the next year).
More resources: Let me also recommend Peter Renton’s post at LendAcademy, the follow-up comments on that post, and this forum post by AmCap as good references for an intelligent discussion on the topic. Also see the LendingClub and Prosper tax pages, even though they aren’t especially helpful.
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Thanks for the mention and the links. Taxes can be quite complicated and I think you have done a good job of distilling it down. I think it should also be pointed out that there is not even a consensus among accountants yet on exactly how taxes should be treated and the IRS has never made a ruling on the topic of peer to peer lending. So, different accountants may provide slightly different opinions.
DO NOT PUT YOUR 1099-MISC BOX 3 INCOME ON YOUR SCHEDULE C!!! 1099 Misc – Other Income is to go on your 1040 on line 21. Other Income from a 1099-Misc is subject to Income Tax only (in this case) because it isn’t business income or self employment income. If you report it on your Schedule C, you will be subjecting it to Self Employment Tax (13.3% in 2012 – 15.3% in 2013).
@Peter – Definitely, thanks for your well-written post. I think it’s good at least that we tend to be in a agreement on what is considered ordinary income and what is considered capital gains/losses.
@Mike – Thanks, that is a good point, all the 1099-MISC income that I have ever gotten from a P2P lender has been in box 7, which counts as self-employment income. Box 3 is different. If you’re using TurboTax or similar, typing in all the information box-by-box should keep you on the right trick.
Even if the income showed up in box 7 on a 1099-Misc, I would likely put it on 1040 line 21 and not schedule C. P2P lending is not the same as being an independent contractor. For most people this won’t make a difference because SE tax doesn’t kick in until $400 in earnings. Eitherway, what is reported there is definitely not SE income.
From the IRS 1099-Misc Instructions:
Box 7. Shows nonemployee compensation. If you are in the trade or business of catching fish, box 7 may show cash you received for the sale of fish. If the
amount in this box is SE income, report it on Schedule C or F (Form 1040), and complete Schedule SE (Form 1040). You received this form instead of Form W-2 because the payer did not consider you an employee and did not withhold income tax or social security and Medicare tax. If you believe you are an employee and cannot get the payer to correct this form, report the amount from box 7 on Form 1040, line 7 (or Form 1040NR, line 8). You must also complete Form 8919 and attach it to your return. If you are not an employee but the amount in this box is not SE income (for example, it is income from a sporadic activity or a hobby), report it on Form 1040, line 21 (or Form 1040NR, line 21).
I think it depends on what generates the 1099-MISC. If it was a passive activity like receiving a late fee on a P2P loan, that doesn’t seem like it should go on Schedule C. But mine were for referral bonuses (“refer a friend and you both get $25”), which I equated to paid survey money that also generated 1099-MISC income that I put down as self-employment income. Again, I’m not a tax person.
One thing that I haven’t seen mentioned is that income from OID notes is considered to have occurred regardless of whether or not the payment from the note actually occurred. I believe the IRS refers to this as the Constant Yield Method.
That is, if you purchase a note for $100 that has a 36 month term and earns 10%, the IRS considers this note to have a redemption value of $116.16 (principal + interest you’d earn) in 3 years. Therefore, the income will accrue as $16.16/36 months = ~$0.448/month. Assuming the note issue in January and held for all 12 months during a year, you’d report income of $0.448 * 12 = $5.39 even if the borrow paid less (maybe payment plan or they missed a payment).
Ref: http://www.irs.gov/pub/irs-pdf/p1212.pdf
I’m neither an accountant nor tax adviser so if I’m mistaken on this, please correct me.
– MikeB
I was a bit too quick and now see that the forum post by AmCap does indeed touch on the issue I mentioned.
– Mike
Have you considered opening an ira with lending club? I’m thinking about it but $10000 to maintain the account without fees sounds like a lot. I’m really interested in hearing what you think are the pros and cons of lending club ira, thanks.
I like that this article mentions long term vs. short term losses (due to charge offs or trading on Folio at a practically worthless price), and suggests writing them off as a non-business bad debt loss. Unfortunately, the documentation requirements for doing that wouldn’t be practical with P2P notes (technically, they want each debt listed with debtor names, descriptions, etc).
LendingClub breaks out both types of “transactions” (charge off or Folio sell) as LT or ST, similar to how a brokerage does for stock transactions. But it really isn’t fair to take a long term loss when all of the potential income is reported essentially as short term (it ends up on the interest line). And LendingClub provides no insight as to whether a Folio transaction will be LT or ST until after it has been made… plus they are usually a net loss, or break even at best, so there’s rarely any desire for a LT “tax advantage.”
It would be very neat if LendingClub (and the taxman) would break out the long term OID interest received after holding a note for a year. It is a committed investment, after-all, and then it’d be reasonable to tax losses as LT or ST. It only seems fair to consider something a long term loss if it had the potential to be a long term gain, otherwise you’re only allowed to recoup 15% of your loss, when (as a gain) it would have been charged your bracket rate (probably 25%). If it eats away at other investments that do report LT gains, that’s essentially a 10% “reverse tax advantage” on your loss (A.K.A. a penalty).
That all has me scratching my head, so here’s a simple real world demonstration:
Given: $100 note, 5 year term at 10% interest
Given: You have other long term capital gains from stocks
If the note charges off at 365 days, the lost principle is a short term loss (an ~$80 write off at 25%= ~$20 relief)
But if the note charges off at 366 days, the lost principle is a long term loss (an ~$80 write off at 15%= ~$12 relief)
Consider: Notes disproportionately charge off after becoming seasoned, which is defined as more than 1 year old
Consider: If the note went full term, the “interest” is always a short term gain. So the income gain is always treated the same way, but the income loss is treated different based on age.
I know those estimations are rough, but the end number and relativity is very close without having to figure amortization. That’s an $8 difference, on just one somewhat typical $100 note! It adds up quick!
Perhaps I am missing something, but can’t I just use the year end summary if we didn’t see any loans on the secondary market?
Loan interest + late fees – losses – Service fees = Amount we owe taxes on
That may be true in a broad sense, but you have to report it in a particular way on your tax return. Capital gains/losses are not reported in the same place as interest income. Put another way, there is no box on your tax return for “put in the amount you owe taxes on”.
Thanks for this. I have been interested in these sites for a while, but have been somewhat concerned about the “headache” factor – for my small dollars ($5,000), am I better simply going with an ETrade? All told, how much time did you have to devote to figuring out the tax reporting of your gains?