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Doing Your Peer to Peer Lending Taxes

by Peter Renton on March 9, 2011

[Update: Much of the information here is now out of date. Please see the latest tax guide here.]

Last night I finally started working on my taxes for 2010. One of my first jobs was to go through my statements for both Lending Club and Prosper. Unfortunately this is not a trivial exercise. Now, I am not an accountant, and this blog post should definitely not be construed as tax advice; you should always contact a tax professional before taking any of the actions I recommend here. Having said that, here are some suggestions that you can take to your CPA.

Lending Club Taxes

For long time investors, those people that hold loans that originated prior to October 14, 2008, you will receive a 1099-INT if the total interest you earned in 2010 for all these loans was greater than $10. However, everything changed after October 14, 2008 (this is the date that Lending Club exited their quiet period and the notes became registered with the SEC). From that point onwards each loan that you hold in your portfolio became a separate “security”, similar in nature to stocks and bonds (at least from a tax perspective).

Your Lending Club 1099-OID

So, for those newer investors, like myself, you may receive a 1099-OID (Original Issue Discount). This is where it gets confusing. With Lending Club your 1099-OID may not reflect your total taxable income received from Lending Club. What? I have put that last sentence in bold because I imagine many people will get this wrong. Your 1099-OID will only reflect interest income received on notes where the total interest on that note is in excess of $10.

Now, if you have a portfolio where most of your loans are $25 or $50 then you will have many loans that have total interest for 2010 that is less than $10. For me, I have 338 loans in my taxable Lending Club account, and on just 19 of them did I earn more than $10 interest. There is a misconception in some places that Lending Club will send you a separate 1099-OID for each note that incurs at least $10 interest. That is not true. I received one 1099-OID with one line for each note that produced at least $10 in interest.

But I didn’t receive a 1099 from Lending Club

Many investors will not receive a 1099 from Lending Club. If you have no notes that produced at least $10 in interest then you will not receive a 1099-OID at all. So you may think you are off the hook for your taxes. Wrong! You still need to declare your income earned from your p2p lending investments on your taxes.

Lending Club service fees

Everyone who had investments at Lending Club during 2010 will have a year end statement. It is available on Lending Club’s statement page along with your monthly and tax statements. The year end statement provides some key information that you can use in calculating your taxes. It shows your total interest income, income from fees, losses from charged off loans and a net total return. It contains everything you need except one piece of information: service fees charged by Lending Club. You should be able to deduct these service fees from your p2p lending interest income on Schedule A if you itemize your deductions, although the 2% haircut rule may come into effect here. To figure out the total of the service fees charged you need to access all your 2010 monthly statements. There is an amount for service fees on page two of each statement.

Prosper Taxes

All these same principles apply to Prosper. But Prosper does make it a bit easier than Lending Club at tax time. For a start, on Prosper’s 1099-OID they include your total interest for every note not just those notes that earned at least $10 in interest. So your 1099 contains a more complete picture of your p2p lending earnings at Prosper. Also, on Prosper’s year end statement they include all the information you need including the service fees (they are not included on the 1099); you don’t need to do digging into your monthly statements for anything.

Your P2P Lending Taxable Earnings

So, in the end. it may seem complicated but it really isn’t that bad. From start to finish it took me less than an hour to calculate my p2p lending taxable earnings. Here is an equation that should make it easier for you:

Total Interest Earned + Late fee income – Losses from defaults – Service fees – Interest Declared on 1099s = Unreported taxable income.

Avoid the Tax Headache Completely

Having said all this, my advice to you is to skip the whole tax headache completely. How? By opening up a Lending Club IRA. Then you will never have to worry about working out taxes on your peer to peer lending investments. I have two Lending Club IRA’s (my wife’s traditional and Roth IRA) and will be opening up another one in my own name soon. Better than avoiding the headache at tax time is having your money grow tax free. Unfortunately Prosper doesn’t offer an IRA product, so Lending Club is your only option here.

The one piece that I have not discussed here are loans bought and sold on Foliofn, the secondary market. I didn’t include this in my research, mainly because I didn’t use the trading platform at all in 2010. I know many of my regular readers do use the platform so I would be interested to hear feedback from how you handle your taxes. I would also love to hear from a CPA who is a p2p investor to ensure my logic is correct.

Related Tax Resources

Lending Club Tax FAQ – LendingClub.com
Lending Club and Your Income Taxes – fivecentnickel.com
Lending Club Taxes – American Banking News
Don’t Throw Away Your P2P Lending Gains at Tax Time – Social Lending Network
Prosper Investor Taxes FAQ’s – Prosper.com
Prosper taxes wiki – Prospers.org

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