My two favorite investments are p2p lending and high dividend-paying stocks. A good portion of my overall portfolio is in individual stocks that yield 4% or more. While I like the income I receive from dividends my favorite part about them is their tax treatment.
Come tax time I only have to pay 15% in taxes to the government. Unlike my p2p lending investments that are taxed at my standard rate. I am paying close to double the tax rate on my Lending Club and Prosper interest income compared to my dividend income. Then, of course, I have had some nice capital gains (long term) over the last couple of years that is also taxed favorably.
The Looming Fiscal Cliff
But this favorable tax treatment may be coming to an end. Now, we have the looming fiscal cliff that the media loves to talk about. If Congress does nothing then the Bush era tax cuts will expire and we will be back to 2002 tax rates where dividends were treated as ordinary income. If this happens then dividend paying stocks will no longer have any tax advantages over other forms of income such as p2p lending.
Even though Congress still has several weeks left to pass some kind of extension or new tax law the effect of the fiscal cliff is already being felt. One company has decided to pay their dividend early so that it happens this year rather than next year. In the recent market pullback dividend paying stocks have been hit the hardest according to CNBC.
What it Means for P2P Lending
We are coming up on four years with interest rates hovering close to zero. Dividend stocks have been one of the bright spots for investors. Many blue chip companies pay attractive dividends and with favorable tax treatment dividend stocks have been very popular. But if that favorable tax treatment ends then many investors will actively look for alternatives. Not only that but investors who have a some of their portfolio in p2p lending could well allocate more money into Lending Club and Prosper.
Now, will it be a gold rush? No. Many investors will still be hesitant about p2p lending and decide to move their money elsewhere. But with the industry maturing I expect there will be many new investors coming on board regardless of what happens to taxes. New tax rates will just accelerate the process.
Of course, if Congress does nothing not only will tax rates go up but government spending will go down. That could well plunge the econcomy into recession. And that would be bad for p2p lending investors as we would likely see defaults rise. But that is a topic for another time.
What fo you think? Will a hike in dividend taxes impact your allocation to p2p lending. As always I am interested to hear your comments.