As tax time quickly approaches, the annual question of how to report income from peer to peer lending investments comes up with little guidance from either Prosper or Lending Club. However, for the first time, Lending Club has put together a five-page tax guide explaining their soon to be released tax forms. Below I will touch on some of the highlights of those forms with a link to the guide at the end of the post.
Before I go forward, please note that none of the information below can be construed as official tax advice and is simply my interpretation of Lending Club’s tax guide and my experience from previous my own personal tax filings. Consult your tax advisor as to your own personal tax situation.
Lending Club will be issuing a Consolidated 1099 in 2013 that will include all of your taxable income activity for both your Lending Club and Foliofn accounts. Each investor’s tax packet can contain up to three forms for their Lending Club account and one for their Foliofn account. In addition to providing the IRS mandated information, Lending Club will also include details of charged-off loans (which can be taken as short-term or long-term losses). These Consolidated 1099 statements will be available by January 31, 2014.
Lending Club Tax Information
The first of the three Lending Club forms within the tax form packet is the 1099-OID, which contains the net interest received, late fees, and recoveries of unpaid interest from previously charged-off loans, less servicing fees. This number is aggregated from all notes held in an account and is reported as interest income on Schedule B of your personal tax return as taxable interest income.
The second of the three Lending Club forms is the 1099-MISC, which contains any other income from Lending Club such as referral bonuses or any other incentives. This income is reported as other income, normally passing through to line 21 on Form 1040 for individual filers.
The third and last of the three Lending Club forms is the 1099-B, which contains any proceeds or recoveries on previously charged off loans. This form contains several pieces of information as required by Form 8949 and/or Schedule D, such as date of sale, date of acquisition, type of gain or loss, sales price (recoveries less fees), and loss not allowed. Not everyone will have the same information provided.
I should note here that Lending Club does not submit cost information to the IRS; therefore the 1099-B will not provide any cost basis. Considering this 1099-B is reporting any additional recoveries on already charged-off loans, I would anticipate the cost basis to be zero anyways and this is a non-concern for me.
Foliofn Tax Information
For Foliofn, one form is provided, a 1099-B which reports the proceeds from the sale of notes on Foliofn, and is reported either on Form 8949 or Schedule D. The same detailed information that can be found on the 1099-B for Lending Club is found for Foliofn transactions. These include the date of sale, date of acquisition, type of gain or loss, sales price net of trading fees, and loss not allowed.
Again, as with the Lending Club 1099-B, Foliofn will not be reporting the cost basis to the IRS on the 1099-B. However, in the prior year, my 1099-B from Foliofn included the principal balance at the time of sale, which is in effect your cost basis (unless the note was purchased on Foliofn).
Supplemental Information – Charged-Off Loans
Unlike in previous years, Lending Club will be providing a supplemental schedule detailing the charged-off loans for 2013. Depending on your individual tax situation, you may or may not be able to deduct these as capital losses on Form 8949 and/or Schedule D. The information to be provided on this schedule will be as follows:
- Date of sale (charged-off date)
- Date of acquisition
- Loan principal balance at charged-off date
- Whether the note is a new issue or secondary market acquisition
- Original purchase price
- Premium or discount from secondary market acquisition
- Principal balance net of secondary market premium or discount
This additional supplemental schedule is going to be a tremendous time saver for those with large taxable accounts. I am quite glad that Lending Club is providing this information as it will be a great help for those who acquire and/or sell notes regularly on the secondary market that end up getting charged-off.
My Thoughts on the Tax Guide
After many years of no help, and very little guidance from the limited frequently asked questions on Lending Club’s site, this tax guide is a welcome resource to help guide folks through the understanding of where information is getting reported. While Lending Club cannot offer specific tax advice due to legal concerns, this guide is clear enough to help those folks filing their taxes at home to get a good grasp on what is required.
For me personally, this guide has confirmed my tax treatment of my Lending Club income. The supplemental schedule detailing charged-off loans offers investors the biggest value from Lending Club’s tax reporting. For those with large taxable accounts, not having to go back through 12-months of account statements to aggregate this information will be a big time saver.
Below you will find the recently released tax guide from Lending Club and a link to their online frequently asked questions online resource:
Lending Club’s Tax Guide (PDF)
What are your thoughts on the tax guide or peer to peer lending tax reporting? Any questions or concerns with tax issues and peer to peer lending?
Flickr: 401(K) 2013
Thanks for the post Adam. I’ve wondered how those profits and losses were treated. I was guessing 1099-Misc I’m sure as they become more heavily scrutinized and regulated the IRS will be more clear about the tax treatment. Have a great day
-Bryan
I agree things are still a bit murky and uneven (losses are capital losses while income is ordinary income). I would expect over the next 3-5 years some further guidance and clarification come out from the IRS.
Thanks for stopping by Bryan.
This is welcome help. Thanks for the summary.
-RBD
Not a problem RBD!
This will be the first time I’ll be having to deal with tax forms from Lending Club and it’ll be interesting to see how it goes. Luckliy, it shouldn’t be too complicated. I didn’t have any note purchases or sales in the secondary market and none of my notes have been charged off (account is only 8 months old). I’m hoping that should simplify the process immensly.
Should be pretty straightforward for you given the relative simplicity of your 2013 activity. I would expect you would only need to report interest income this year.
Thanks for stopping by Micro!
Awesome! I’ll have to look into this. Hope all is well!
Glad to be of assistance and I hope all is well with you CI!
Hello,
In 2013 I sold many notes. Now my 1099B is about 50 pages long.
Do I have to report every single trade on schedule D?? or can I just put a
summary with the total?
thank you so much
Frank, first off, take anything I say with a grain of salt and discuss with a professional tax adviser.
In my past experience (I sold a good sized amount of notes in 2012) I reported everything grouped by tax treatment. All the long-term gains, long-term losses, short-term gains, and short-term losses were grouped separately and reported that way on Form 8949. Ultimately this gave me four separate totals which I input from all my Foliofn trades. Additionally, I scanned a copy of the 1099 from Lending Club and sent it in with my return to substantiate my numbers further.
Hope this helps!
For Folio, I have 20 pages with no cost basis (I understand that they don’t have to report this to IRS which is fine but if they added 2 columns in their database and put it on the statement, it would have been so much easier). How is everyone handling this? Going back to the statements and figuring this out one by one? I have sold notes purchased from Folio and original notes from Lending Club so, I am guessing I have to factor the Discount/Premium and Service Fees into cost basis. All this is not worth the little I am making on lending club. I will sell all my notes and buy back in future if I have spare money to put in an IRA to avoid this.
TraderZ, thank you for stopping by and commenting. I have some answers to a couple of your questions, but note I am not a tax advisor and these are my opinions.
Based on the 1099-B I received in 2012 for notes I sold as I did not sell any notes during 2013, I was provided a 1099-B that included the principal balance of each note at the time of sale. This was totaled at the bottom and broken into long-term and short-term amounts. Generally speaking, your cost basis is the outstanding principal balance of the note sold for notes in which invested directly. For those that carry a premium or discount from purchase on Foliofn you will need to net the principal balance against those premiums or discounts. All service fees are already net against proceeds or interest income, so you will not need to account for those separately.
Hope this helps and let me know if you have any other questions.
Thanks for the information. The problem is that this year they have chosen to not include that information – only the sold amont shows that is reported to IRS.
TraderZ, I was just able to confirm with another investor that the principal balance at the time of sale (not reported to the IRS) was shown in between the columns for box 3 (Cost or Other Basis) and box 4 (Federal Income Tax Withheld). Are we sure that we are discussing the same form?
Hi writing2reality,
Thanks for the information. Ok one step closer, I do see the ‘Principal Balance at Sale’. In your opinion (not tax advise) is there a quick way to figure out this principal against the net of premium or discount without looking at individual notes one by one? I am just looking for a total figure and I will attach the detail printout to my tax filing.
The only way I can think of doing it quickly would be to try and convert all of the information to Excel and do an Excel lookup based on each loan’s ID. You would need both your 1099-B and your Foliofn purchase activity. You would create a column in your Foliofn purchase activity data to show the discount/premium.
By performing an Excel lookup from the 1099-B data to the Foliofn, you could essentially determine your discount/premium for each Foliofn note, then add or subtract it against the outstanding principal at the time of sale. For any note that isn’t found in the look up to the Foliofn purchases would more than likely have been acquired directly. Those notes would not need to be adjusted by any net (lookup results column could just reflect zero for these notes). You could then use this spreadsheet to support your cost basis numbers. It goes without saying you could total these discounts/premiums up in the same long-term/short-term way that the 1099-B is broken up in as you will have that information in the Excel file.
I hope that makes sense and helps!