At this time I am following a very similar method to the one Peter laid out here: 2013 Lending Club and Prosper Tax Guide

While I am not a tax expert, I reporting my interest received as regular interest income and deducting my write-offs as capital losses. In addition, I am reporting the net gains from my note sales as long or short-term gains, which will be offset by any losses. At this time I have not calculated my 2012 after tax return on investment.

I think both Lending Club and Prosper have a ways to go in determining the appropriate reporting as it relates to what is described in their prospectus. They are far from perfect in this regard and have ample room for improvement.

Are you reporting all of the OID interest as regular interest income, and the loan writeoffs reported on your year end summary as capital losses? Have you calculated your after tax return?

Upon reading the prospectus, it appears to me that LC has done the rather unclever trick of converting capital losses into regular income. The after tax consequences of this are extraordinarily negative.