The 2013 Lending Club and Prosper Tax Guide

[Update: There is now a 2014 Lending Club and Prosper Tax Guide.]

[Disclaimer: I am not an accountant nor am I qualified to provide tax advice. This post merely shares what I have learned from Lending Club and Prosper and how I am doing my taxes this year for my p2p investments. You should definitely seek professional advice before taking action on any of the ideas presented here.]

The tax issue continues to be somewhat complicated for p2p lending investors. Unless you have recently opened your account or have all your investments in some kind of retirement account you would have received a 1099 from Lending Club and/or Prosper this year. This post will try to cut through some of the complexity and explain what all the numbers mean. I will also be sharing how I am doing my taxes for 2012.

Lending Club Taxes

The big change this year is that Lending Club now reports all the interest you have earned on their 1099-OID. In previous years it only included interest for notes where the total interest earned during the year was more than $10. So, if you had a portfolio of only $25 notes you would never even receive a 1099. But legally you were still required to declare all your interest income to the IRS.

Your 1099’s at Lending Club are available in the Statements tab at the top right of your screen. Then click on Tax Statements and you will see the PDFs to download. Important: You will not receive a 1099 in the mail – you must download your statement from that page. If you don’t see a link for Tax Statements that likely means you have a retirement account. Lucky you – you can avoid this whole tax headache.

An Explanation of the Lending Club 1099s

1099-OID – Now, your 1099-OID should accurately reflect your total earnings. Service fees are now deducted from the amount of your 1099 as well.  Here is the exact formula for the number in box 1 of your 1099-OID as provided by Lending Club:

1099 Interest = (regular interest + regular late fee – service fee) + (recovery interest + recovery late fee – recovery service fee)

Lending Club issued an amended 1099-OID on February 21st so that the OID amount is now net of service fees, this was not the case in previous years.

1099-B (Recoveries) – This 1099-B was not released until February 21st and it includes any recoveries from charge-offs. If you received a payment in 2012 from a previously charged off loan then you will have a 1099-B. The amount in Box 2a is the net amount recovered less any collection or service fees.

1099-B (Folio) – If you sold any notes on Foliofn, the Lending Club trading platform, in 2012 you will receive another 1099-B. This one must be downloaded from the My Account page on Folio (look under Tax Documents). This documents details all your trades and summarizes them into long term and short term totals.

1099-MISC – Some lucky investors will received a 1099-MISC – this is usually because of a bonus received. I know Lending Club has stopped running investor bonuses these days but they have run them in the past and if you earned more than $600 in bonuses in 2012 you will receive a 1099-MISC from Lending Club.

1099-INT – This form is outdated now because it pertains to notes issued before October 14, 2008. These were all three year loans so they should have reached maturity before 2012. But there were likely a few notes that did have payments in 2012 and these are reported on the 1099-INT form. I didn’t begin investing until 2009 so I have never received a 1099-INT.

Prosper Taxes

Now, in an ideal world Prosper would issue their 1099’s in the exact same way as Lending Club. Alas, we do not live in an ideal world. Prosper’s 1099s are very different. What I do like about Prosper is that everything is in the one consolidated document (other than Folio trades).

Like Lending Club, Prosper does not mail any 1099s – you have to download them from their website. At Prosper you click on the History tab and then Statements and you will see your 1099 there in a list with all your monthly statements. You are looking for the Consolidated Form 1099 dated February 28th.

The Prosper 1099s Explained

As Lending Club did Prosper issued an amended 1099 a few days after the first one.  But then just last week Prosper issued a second corrected 1099. You should discard any previous 1099s that you downloaded before February 28th.

1099-OID – This is a very straightforward form. Unlike Lending Club you get no detail here, just some totals. It is at the very end of your Consolidated 1099 so you may need to scroll through several pages to see it. Box 1 is the Original Issue Discount amount for 2012, which is the total interest earned. This number, though, may not exactly equal the total amount of interest you earned. It may be less. Here is an explanation of the 1099-OID from the notification email Prosper sent out last weekend:

We have modified our OID methodology to use actual interest received, less actual servicing fees paid, rather than using a schedule to estimate these values. Your 2012 OID includes both your actual interest less servicing fees received in 2012, plus an adjustment for prior years to bring the methodology into alignment since the inception of your portfolio. In addition, we now have a standardized approach for notes purchased on the secondary market at a premium or a discount that more accurately calculates the reamortization for these not-at-par transactions.

Basically what this means is that long time Prosper investors may have received 1099s that inflated their actual interest earned. If that was the case that amount was deducted from your interest earned in 2012. We are not talking big numbers here. My original 1099-OID showed $8,871 in interest in 2012. My final 1099-OID issued on Feb 28th with this adjustment was $8,799. So, it is less than a 1% adjustment and hardly worth re-filing your return if you have already sent it in.

1099-MISC – Also on the new consolidated 1099 is the 1099-MISC. This form just provides the total late fees received as well as any rebates you might have received. Before this number was included in your 1099-OID total.

1099-B (Recoveries) – Prosper issues a 1099-B that details all the charge-offs as well as any recoveries. There is a useful summary at the top breaking down your gains and losses into short term and long term (a year or longer). The amount that was charged off is included in the Cost Basis (Box 3) column and recoveries are included in Sale Price (Box 2). Now, the title of the columns are IRS standards, this does not mean your loan was sold. For recoveries, these are payments that were received by Prosper after your note was charged off. But the amount included on your 1099 is net of service fees and collection fees.

1099-B (Folio) – This was just issued this week from Folio and is the last piece in the tax puzzle for 2012 taxes. But if your gains on Folio were less than $10, as mine were, then you will not receive a 1099-B from Folio.

How I Am Filing My 2012 P2P Lending Taxes

I have met with my accountant and this is how I will be filing my 2012 taxes. Now, keep in mind there is no agreed upon standard yet for reporting p2p lending income so your accountant may do it differently.

  1. Interest earned from Lending Club and Prosper, as reported in Box 1 of their 1099-OID is included as taxable interest on page 1 of your 1040. I list the totals for each company separately on my Schedule B.
  2. All charged off debts are reported on Schedule D as short term or long term losses. Then I include a separate line on the Form 8949 for both Lending Club and Prosper losses with date acquired and date sold listed as various. I know others who have detailed these bad debts one-by-one with purchases dates and charged off dates but my accountant thinks that is unnecessary.
  3. Gains reported on trading activity from the Foliofn trading market are reported on Schedule D as well, separated into long term and short term gains. The totals are in the 1099’s you received from Folio.
  4. Gains from Lending Club’s 1099-B (Recoveries) as well as late fees received on Prosper’s 1099-MISC are reported as gains on the Schedule D.

While it is not a trivial exercise working out your tax liability for your p2p lending investments, once I knew what I was doing it wasn’t that bad.

More P2P Lending Tax Resources

As I said at the start of this article you should not take my advice without consulting with a tax professional. But if you want to learn more here are some online resources for you:

Lending Club tax FAQs
Prosper tax FAQs
IRS Publication – Investment Income and Expenses

I would love to hear what other think, particularly any CPA’s or tax professionals. What would you change from the way I am doing it? What did I miss? Please leave a comment below.

photo credit: 401(K) 2013 via photopin cc


  1. says

    Nice, thank you very much for the writeup.

    If memory serves, dealing with LC and Prosper taxes was much worse in the past because they only issued a 1099 on loans that earned over $10 in interest. It is much easier now.

    • says

      Yes. That was the case for Lending Club the past few years but Prosper has always included the total interest from every loan. It is nice to have them both consistent now.

  2. Xseller says

    Thank for all your work Peter. As far as Lending Club charge-offs to report as short/long term losses, how do you establish the date the loans were charged off? The monthly statement gives the total dollar amount of charge-offs but I can’t find the date a particular loan was charged-off in the case of loans that were charged-off but nothing was recovered (ie they are not listed on the 1099-B Recoveries for Charge-off unless there was an amount recovered)

    • Roberto Perelman says

      It is my understanding that you do not need to make a distinction between short term and long term charge offs. Per IRS Pub 550, page 58: “How to report bad debts. Deduct nonbusiness bad debts as short-term capital losses on Form 8949.”

    • Rob Collini says

      When LC marks a note as Charged-Off, the “Payment Due Date” field effectively becomes the “Date Charged-Off” field, because they add a line in that note’s payment log on that day. You can just use the Notes section of LC, filter for just charge-offs, and every note with a “due date” in 2012 is a note you’re looking for.

  3. Xseller says

    Thank you. Based on that info, I will proceed on the assumption that I can group all charge-offs (those not reported on the 1099-B) on 1 row (short-term) on Form 8949 with acquired/sold dates as “various”. Since there is no date to identify which of the charged-off loans were charged-off in 2012 (I have a lot of them unfortunately) I will need to “derive” the proceeds(column d) and cost basis (column e) to arrive at the total charged-off loss (column h) as shown on the year-end monthly statement. I

  4. Mike says

    Thanks for the excellent write-up Peter! I found your information very informative both this and last year. Just to add my 2 cents; I am doing my taxes through TurboTax this year. I called and talked with a CPA as to how to handle the Lending Club 1099-OID and this is what I found out.

    Enter the 1099-OID amount per the normal routine. Then revisit the page and click “edit” and the “I need to adjust this amount” checkbox. You’ll then proceed to the next screen that asks you why. You are given several different options – the CPA told me to select “To adjust the amount of original issue discount the payer reported.” Then enter the amount of all your charge offs for the amount to be adjusted. Once that is finished, go back to the “2012 Income Summary” page and you’ll see that next to OID it shows the original amount reported by Lending Club. For some reason, TurboTax reports the “credit” on the 1099-INT line. So for example if my LC 1099-OID was $3600 and my losses were $1000 I’d see $3600 on the OID line and -$1000 on the 1099-INT line. Note: This is assuming you don’t have any other 1099-INTs or OID’s to report. Not sure how this all lines up as far as Schedule D, etc. (I’m not tax expert) but the CPA assured me this was all correct. Just thought I’d chime in for those letting the tax software handle their taxes…

    • Roberto Perelman says

      I wish what you wrote was correct, but I’m afraid it may not be. If it were, the net result would be that you are directly decreasing for tax purposes your OID earnings by the amount of the charge offs, which would be awesome. Unfortunately, my understanding is you have to treat the charge offs as capital losses, where they are useless if you don’t have capital gains to subtract your losses from.

      • Mike says

        Thanks Roberto. I don’t claim to be a tax expert – just trying to inform others what I learned from a TurboTax “expert.” I went back through and re-did my taxes using what I THINK is the correct way based on your and Peter’s comments. Interestingly enough, my refund amount is the same using either method.

        FWIW, I found all of my loans through LC that were charged off in 2012 and verified the number matched the LC 2012 Year End Summary. I then found the total amount of principal of all those loans (original loan amount) and the amount of principal remaining. I then found the difference of the two numbers, plus all svc fees, to get my “net sale amount.” So for TurboTax I went to enter a capital gain/loss and entered the Net Sale Amt (in this case I “made $200″). On the next screen I entered the original loan amount. Because they require dates, I put the loan date as the issue date of the first defaulted loan, and the payment expected date as the most recent payment due date for the defaulted loan (6/28/10 and 12/22/12 in my case). TurboTax did the calculation and saw that this resulted in a capital loss. It then went to tally my refund and it turned out to be the same value. Hopefully they’re filling out the correct forms “under the hood.”

        One question, when going to enter my capital gain/loss TurboTax mentioned it was gross proceeds minus commissions (referring to stocks), so I felt it was justifiable to put the LC svc fees. Does this sound right to you?

        • Boatguy says

          I think you, and your “expert” are seriously mistaken in your tax treatment. If you read the LC prospectus, specifically the section beginning on page 66 regarding income tax considerations.

          As Roberto points out, the and prospectus makes very clear, your OID income is all taxable, and your writeoffs are capital losses. You cannot arbitrarily choose to re-categorize your capital losses as a regular income loss, if you could we’d all be paying less tax!

          And as Peter explained, the income reported on the OID is already net of your service fees.

        • CA-Lender says

          That is absolutely NOT correct….hopefully you just misunderstood your CPA. (That information borders on incompetence)

          Your taxes are the same because your capital losses are below the $3000 annual deduction amount and you end up returning a net of $2,600 in taxable—if the loses were, for example, $10,000, and your interest was $12,600 (net gain of $2,600, but net taxable gain would have been $9,600), you would see a very big difference in your tax amount.

          • Mike says

            @Boatguy – No need to be a dick. The whole point of posting here is to make sure I get the taxes done right.

            @CA-Lender – Thanks for the info on why they’re the same; my chargeoffs were only ~$1800 so that makes sense. Guess I’ll have to rethink investing too much more in LC or I’ll get start getting screwed with taxes like many other big investors have talked about. As for misunderstanding the CPA, I think it was more of a lack of knowledge on their part. TurboTax caters to the easy tax returns – time to look for a real CPA.

  5. says

    Thanks for all your comments. I think everyone should also read the comments on my forum from AmCap who is a tax lawyer and he thinks LC and Prosper have it wrong.

    A couple more points I should note:
    1. I think that Roberto is right – you can deduct bad debts as short term capital losses on Form 8949 regardless of how long you held the security.
    2. Mike, I don’t think it is advisable to reduce the OID amount for your losses. See point 1 above.

    The unfortunate thing is that we are still nowhere near consensus on this matter. I am going to lobby for LC and Prosper to produce some uniform treatment for taxes next year. Maybe it will become simple one day….

  6. PennySaved says

    The date of the charge-off is in the Collection Log and is not necessarily the due date listed under the Payment History. It is usually a few days later than the last listed due date. For example for Loan 990709:

    Payment History:
    Due Date 1/28/13 Status: Charged Off
    Collection Log:
    1/31/13 (Thursday) Charged off. PAYMENT 120+ past due. Collections efforts exhausted. Recovery unlikely.

    Being a stickler for detail, I use the charge off date in the collection log for my documentation as well as the description for the reason for chargeoff on that date.
    I actually list each charged-off note with its Note ID on Form 8949 using the note/loan chargeoff date from the collection log as the “Date sold or disposed” in column c of Form 8949. I collected all this information in a spreadsheet anyway for documentation so I think reporting it on the Form 8949 is not much more trouble, but I only had 21 charge-off loans for 2012. I guess if someone had hundreds, then it could be tedious. I just what to make sure that I have all the information easy to find in case I am ever audited. It just seems to me that when the IRS is asking you for a specific date and you provide “various” that is vague and could be open for questioning. I had posted more details on this here:

  7. Daniel says

    Peter, first off – thank you very much for this post. It’s extremely helpful.

    One question, when you wrote that you reported gains from Prosper’s 1099-MISC on Schedule D, what line on Schedule D did you list them on. I’m using turbotax software and it automatically lists the income as “Other Income” on line 21 of Form 1040. Any suggestions?

  8. Greg says

    Peter, Thanks for the informative story.
    But I have a couple of questions.
    I formed an LLC for my Prosper Account and a few questions arose while doing my taxes.
    First off a 1099-MISC info can be put into a Schedule C, BUT there is no place to put in a 1099-OID or a 1099-B. I talked to a turbotax CTA and she said to put the 1099-OID info under “Other Income” and 1099-B under Expenses. Should LC and Prosper issue 1099-OID and 1099-B’s for LLC’s?
    I’m going to call IRS this week and see what their take is on this. Any input by you or other readers have would be greatly appreciated.

    • CA-Lender says


      This is an interesting point, and I’ll render my OPINION because I am honestly not 100% sure on the taxation, but here goes:

      If the LLC is just a “holding company”, then the taxation would be identical to individual returns.

      However, if the LLC is an actual “trading / investment business”, then I opine to say you could be able to deduct all the capital losses against OID income. Again this is beyond the scope of my knowledge, but I base my opinion on several tax returns I previously prepared for “day traders”, who were in the “business” of trading stocks, frequently for their on account, as a business, and we took a special election (“mark to market”), which allowed them to deduct ALL their capital losses beyond the $3000 per year (in losing years).

      I am not sure how to justify an LLC that holds P2P notes as a business though. If you were my client, and your LLC holds a substantial balance, I might suggest you speak with a tax attorney.

    • Jack says

      Greg, CA-Lender,

      Just wondering if there has been any updates on the tax code or clarifications from the IRS on reporting OID interest and charge-offs on a Schedule C as business income and losses. I’ve been reporting this way for the past 3 years as a sole-proprietor. The first year the IRS sent me a notice saying I hadn’t reported the OID interest and owed additional Tax. Despite being advised by TaxAudit.Com to pay the additional tax I called the IRS and explained the OID income had been reported on the Schedule C as business income. The IRS made the adjustment and I didn’t have to pay any additional tax.

      I’ve reported it this way for the following two years and haven’t been contacted by the IRS since. To clarify for the IRS, I did start reporting the OID income on the 1099-OID Worksheet and made an adjustment for the full amount and noted that it had been reported on Schedule C Part I instead. Although, I don’t know if they actually see this.

      Maybe I’ve just been lucky?

      • CA-Lender says


        My guess would be that you just been lucky. As far as I know, the IRS has NOT issued any guidance to allow earnings and losses from P2P transactions to be reported as self employment income, as you have been doing.

        To clarify a bit deeper on this. Stock trading is usually reporting as capital gains, however, if a person is in the business of trading stocks, spends a considerable amount of time in this activity, and that is their primary source of income, then that person can report their stock income and expenses on Schedule C. With that said, if a taxpayer has a substantial amount invested in P2P loans, derives their livelihood from their P2P earnings, has no other “primary” job, and spends a significant amount of time actively searching for notes to invest in, keeps copious records of these transactions, I would think they could argue the position that they are self employed “P2P Investors” and report their OID as income, and deduct the losses, as well as other related expenses (subscriptions, etc).

        If someone does report it in this manner, they’d need to report the OID on Schedule B, and then deduct it on a separate line with an explanation that it’s being reported as Self Employment income on Schedule C. Same goes for the charge-offs. If you don’t report it this way, you will automatically get an adjustment notice from the IRS saying you didn’t report OID or Capital Gains (losses).

        Final Warning: Taking this position is a highly risky (and probably incorrect) position, one that the IRS (or possibly the tax courts) would need to issue guidance on eventually. The only way for that to happen is if a taxpayer reports it this way, and forces the IRS to make a ruling. At this point, a taxpayer that is audited on this matter would probably have the items disallowed from schedule C and reported correctly (Schedules B and D). The taxpayer could then appeal, all the way up to Tax Court to see if the court would agree with having P2P earnings reported in the same manner as stock traders. It’s a very shaky argument, but it’s the one I’d make if I was representing a client that was being audited.

        Hope that helps,


        • Jack says

          Thanks for the advice and explanation CA-Lender. I’ve been drawing down my account for the past year because I’ve been uncomfortable with the tax risk. But it was a good stream of income while I was doing it and while it wasn’t my primary job I did actively manage it.

          You mentioned speaking with a tax attorney above. How does that work? Do they give you a legal opinion and then back you in court if needed? Are there tax attorneys that specialize in self-employment, or taxation of P2P earnings?

  9. Eric says

    Peter, great info! Quick question. For the Schedule D, are you putting the proceeds(d) as $0 and the cost(e) as the “Losses (charged off loans)” amount that is on the 2012 YEAR END SUMMARY? Or how exactly are you handling it?

      • Roberto Perelman says

        For what’s it’s worth, here is how I did it:

        For cost, yes, I used the charged off amount reported on the year-end summary. For proceeds, I used the amount reported as recoveries in the 1099-B. For sale date I used 12/31/12, and for date acquired, I used “Various”.

        • Eric says

          Roberto, thanks for the info. You have helped a lot. Peter I’d still like to know if you’re accountant has done it the same way. I would really appreciate it.

  10. CA-Lender says


    As you may know, I am an accountant, and I agree with the way your accountant reported items 1-3 (and the 1099-B info in item 4), but I would report the 1099-MISC amount of late fees on Line 22 of Form 1040. I assume it’s a very small amount for most people (mine was $140, and my account was fairly large), but it shouldn’t make any difference in the bottom line tax amount.

    Here is my reasoning–When the IRS does their computer matching, where they match the info on your return to the tax documents they receive, you might receive a letter saying that you didn’t report the income from Box 3, Form 1099-MISC. You will then have to write a letter explaining that you did in fact report in on your Schedule D. In the end there won’t be any tax change, but I suggest reporting report on Line 22 (Other Income) on Form 1040 to avoid the extra hassle 12 or 18 months from now in dealing with the IRS.


  11. John says

    Peter, Thanks for the very helpful info.

    The only 1099 showing up in my “Statements” page is dated 2/5/13. It is titled “Consolidated form 1099, Year 2012 (Corrected)”. You said it should be date 2/28/13, but I don’t have any such 1099 showing up. Do I need to get Prosper to send me a newer version?

    • says

      John, Thanks for your note, I should have made this clear. Not all investors received the final corrected 1099 at Prosper. If you are only seeing the Consolidated form dated 2/5 then that is the one you should use. My account also shows a 1099 dated 2/28.

  12. Chuck Thompson says

    I have been with Lending Club since early 2008. For tax years 2008 through 2011, I simply paid income tax on the amount shown as the net earnings on my year end statement, not paying any attention to 1099’s because they were so low a number.
    But this spring (March 2013) I have a huge 2012 1099-OID to explain away. And since I invest in mostly Grade E and F notes, I have earned a lot of interest and also have a lot of charge offs.
    The problem is that I guess I was filing wrong the last four years (not that I intend to file any amended returns). By paying income tax on the net earnings as shown in the Lending Club year end statement, I was in effect subtracting the money lost from bad notes from the money earned from good notes and paying income tax on the net.
    But I now find out that it can’t be done that way (I think). Because the IRS wants you to pay ordinary income tax on the interest earned on your good notes, but the charge offs on your bad notes are considered Capital losses and cannot be subtracted from interest income. Instead, capital losses can only be used to write off capital gains.
    This works fine if you have some capital gains to write off or expect to have some in the future (the capital losses can be carried forward).
    Because I am soon going to run out of enough capital gains to write off, I am going to significantly reduce my regular Lending Club investment. I do have a Roth IRA in the Lending Club, and as I understand it, one does not have to worry about tax situations with a Roth IRA because it’s all non taxable or with a regular IRA for that matter because it’s all taxable.
    If anybody has any knowledge about this, please speak up. Thanks

  13. Steve says

    Regarding charged-off loans – it looks like if you report this as a nonbusiness bad debt, then you have to attach a separate bad debt statement ( with additional details like what you did to try to collect. Also, it may prevent you from e-filing.

    Quite annoying and maybe not even worth the hassle of claiming a loss.

  14. CA-Lender says


    Unfortunately, your thinking is quite correct (it’s an issue I previously brought up, either in a comment here or on the LendAcademy forum about a year or two ago). To very briefly summarize what I posted before is that it is possible to end up owing more taxes then your net income from P2P Lending, which I actually consider a moderate (or possibly serious) detriment to the future growth of this industry.

    I’ll provide an example using my numbers from Prosper in 2012:

    My OID (interest) income was ~$26k, and my charge offs were ~$15k. My net income was ~$11k. As I have very large capital losses from 2006 (IRS code only allows deducting a net of $3k per year), I will never be able to take advantage of the ~$15k in charge offs, but I had to pay income taxes on the $26k of interest income, which being in a high tax bracket, high income tax state (CA), and various other tax anomalies, my tax burden on this $11k of net income (because the reported taxable amount is $26k) was around $9.5k. My net, after taxes ending up being $1,500


    Regarding non-business bad debt. My memory is hazy regarding the deductability of this, but if I am not mistaken, it’s still reported on schedule D, as a capital loss, limited to the $3k maximum annual deduction.

    In summary—unless there is an IRS code changes to allow deducting bad debts directly against interest income, this could prove to be a big hurdle in the growth of P2P Lending—especially since this is the first year that LC is reporting interest/OID income correctly (I previously posted that their reporting of OID only on notes that paid over $10/year was not in line with IRS regs). I’m guessing that there might be quite a few P2P lenders that get a bit of a shock when they meet with their accountants this year.


    Next time you talk with Renaud Laplanche or Stephan Vermut, you might mention this issue and see if they have someone that can lobby the IRS for some tax changes to be more “fair” in the taxation of net earnings from P2P Lending activities.

    • Daniel says

      @Steve, @CA-Lender,

      I am unfortunately in the same boat – being taxed on a large amount of OID (interest income) while being unable to deduct capital losses (beyond $3,000) from the defaults.

      One thing to keep in mind is to carry your capital losses forward so that you can deduct the losses from 2012 should you have capital gains in 2013.

      Also, I did not foresee this tax consequence when choosing my investment strategy a couple years back. A friend of mine and fellow Prosper investor was more risk averse and chose only to invest in A-rated loans. He has not had a single default to date. I, on the other hand, invested only in D, E, and HR loans. So although my ROI before taxes was much higher than his, my after tax ROI is a different story.

      Going forward, I believe a more risk-averse strategy (similar to my friend’s) would be more advantageous given my tax bracket, high income tax state (CA), and my inability to offset my capital losses from defaults with capital gains from other investments.

  15. Steve says


    Do you think we need to attach the bad debt schedule and follow the IRS instructions here ( which say:

    “A nonbusiness bad debt is reported as a short-term capital loss on Form 8949 (PDF), Sales and Other Dispositions of Capital Assets, Part 1, line 1. Enter the name of the debtor and “bad debt statement attached” in column (a). Enter your basis in the bad debt in column (f) and enter zero in column (e). Use a separate line for each bad debt. It is subject to the capital loss limitations. A nonbusiness bad debt deduction requires a separate detailed statement attached to your return.”

    That extra paperwork, and the loss of the ability to e-file, are big problems with reporting the bad debt. I’m thinking I’m just going to let it go and eat the $20-25 tax loss.

  16. CA-Lender says


    I don’t think that Pub 550 had P2P lending in mind when the bad debt rules were written.

    Since the charge-off’s are reported on a 1099-B I think that their character is changed from a bad debt to a capital loss as far as the IRS is concerned.

    That is my opinion, but in your case where the amount is $25, it might be not have any tax effect one way or the other, and I don’t see any serious downside if you just wish to ignore it. Worst case is the IRS does a “matching” of documents, recalculates your tax and sends you a bill for $5 or $10 (very small chance of this).

  17. CA-Lender says


    Your Interest (OID) is reported as on Schedule B, as ordinary income.

    Your charge-offs (back debt) and any recoveries are reported on 1099-B, and are reported as capital losses on Schedule D (or Form 8949).

    As I mentioned in my comments previously, this is an unfortunate way to account for these transactions, since they are all part of the a single investment, which was never “sold”, but just like a stock that becomes worthless or a bad debt, it is reported as a capital loss on Schedule D.

    The CPA firms for both LC and Prosper should try to get some type of Revenue Ruling or an Opinion letter, so that P2P companies can roll the charge-offs into the OID amount, which would allow investors to more accurately reflect their net P2P income on their tax returns. While sales on FolioFN would continue to be a capital gain transaction.

    @Peter—Please forward my comments to the appropriate person at both companies 😉

  18. John says

    This adverse tax treatment of the losses is a real drag. Now that I clearly understand the situation, I see no alternative but to greatly scale back my non-IRA LC and Prosper investments.

    Regarding the treatment of the losses: assuming I go with treating all charge-offs as short-term capital losses, and I have only long-term capital gains to offset them, am I correct in thinking that I’m not even getting the full benefit of the losses, since they are being matched 1:1 against gains that would only have been taxed at long-term capital gains rates, whereas the interest from my LC and Prosper loans is taxed at the higher regular income rates? In other words, am I being forced to throw away the benefit of the lower long-term capital gains rate in this scenario?

  19. CA-Lender says


    Yes, you are correct. You offset your short to long-term gains/losses 1:1, therefore losing the favorable treatment of long term gains. But, you are still better off by having capital gains to use to offset the charge-offs. If you had no capital gains, you could only deduct $3000 per year of capital losses, and carry the excess into future years.

  20. John says


    Thanks for confirming. So this means that unless we happen to have only short-term capital gains to offset, Peer-to-Peer lenders are effectively being taxed at a higher rate than all other investment types. Very frustrating!

  21. Chuck Thompson says

    I’m in the same boat as you, John. I have a few capital gains in mutual fund investments which I can write off with some carryover Lending Club capital losses, but since I’m 74 years old, there is no way I will be able to make use of all my Lending Club capital losses at $3,000 per year. Unless we sell our house, which I can’t see happening.
    The last three months (since I fully understood the situation), I have done my reinvesting in only A and B grade notes, but now I think I will stop reinvesting all together in my regular Lending Club cash account.
    I do have a good Roth IRA in the Lending Club and will do another conversion to increase it. My Roth IRA investment is in mostly D, E, and F grade notes, but over time I intend to expand it into A, B, and C grade notes so that if I die, my two sons will inherit something which will have a better chance working out for them, should they decide to allow the notes to run to maturity instead of trying to sell them.
    If Lending Club and Prosper are successful in lobbying to get the tax code changed, I will start investing again. Except for the tax situation, it’s the best investment I’ve ever found.

  22. CA-Lender says

    I think the taxation issue will be a huge one starting for tax year 2012, as LC just began reporting TOTAL interest income on all notes in 2012, while in previous years only reporting interest if individual notes were over $10 (which is incorrect, IMHO), so investors with $25 (or even $50) notes would never have received a 1099 previously and this year they might get a huge 1099-OID and when they see the related tax bite lots of investors might move out of P2P lending or at least move into A or B grade notes.

    Prosper has always reported in this manner, and maybe this is one small reason that their growth has been flat, while all the money has been moving into LC notes.

    • says

      I agree. I think that LC is going to be inundated with phone calls over the next three weeks as many people do their taxes. And there will be a lot of unhappy campers. There are probably some with only $25 notes who thought that you didn’t have to pay taxes on your Lending Club investment…

      • CA-Lender says

        I wouldn’t be surprise if they have zero or very low growth in April as investors digest their true, after-tax ROI.

  23. Nicholas Staber says

    Maybe someone can help me. I think I understand that Peter is doing it this way, quote ”Interest earned from Lending Club and Prosper, as reported in Box 1 of their 1099-OID is included as taxable interest on page 1 of your 1040. I list the totals for each company separately on my Schedule B”. I understand it so far, but the only problem is that I have never filled out a 1099-OID. I ran across this from the IRS. Is this form for me as the investor to fill out or for Lending Club. Here is the link

    The craziest part is that you can’t print the form out, and if you do print it out and send it to the IRS, well then you get a penalty imposed. To make matters even more confusing they say you have to order the form. I am in Germany. Do I need to fill this 1099-OID out? Help. Or do I only have to fill out the 1040 and then on schedule b on the bottom where it says OID or up top where it says interest. Thanks for the help.

    • CA-Lender says

      To simplify, think of the 1099-OID, exactly the same as 1099-INT, and whatever the amount of interest (or “Original Issue Discount”) it shows you would report on your tax return…Depending on the amount, either on Schedule B or directly on Form 1040.

  24. Boatguy says

    CA-Lender has hit the nail on the head! I’ve had a substantial LC account for a few years, but was traveling out of the country and did not pay close attention to my taxes. Now I’m home and when I scratched the surface on the LC tax issue, then read the entire tax section of the prospectus, it appears to me that LC has constructed possibly the worst possible tax treatment for an investment.

    In my case, in 2012 my taxable income is 180% of my actual net LC income, thus my effective tax rate is 180% of my marginal tax rate, or about 70%! With a cap gains rate of just 15% (and many people are 0%), the tax benefit from the write offs is essentially $0.

    And the issue is worse and worse as you buy more poorly rated and higher yielding notes since the percentage of write off’s increases.

    A taxable account at LC makes no sense.

    • CA-Lender says

      To clarify—neither LC nor Prosper chose this tax treatment. This is the correct tax reporting, as required by the IRS.

      • Boatguy says

        Certainly, but who’s responsible is irrelevant to the investing decision; it’s still a bad investment compared with other fixed income investments.

  25. Mark says

    After reading through these threads, I’m really struggling with how to report my capital losses (charge-offs). It seems that it’s simply a matter of reporting Net Proceeds as the amount of Principal collected over the course of the loan and the cost basis as the Original loan amount resulting in your loss/charge-off amount. Any interest and fees seem to have already been accounted for in previous years as interest income. Am I missing something?

  26. John says

    @Mark: Your analysis sounds correct to me, but I’m not an accountant.

    I’m also struggling with filling out my 8949. I can’t figure out any way of easily adding up either the original loan amount or the principal collected for the charged off notes (in order to fill in columns (d) and (e)). Is there some way to get these totals without adding them up by hand? Somebody please tell me there is!

    • Mark says

      There’s not exactly a report for this unfortunately. In my case, I only have 1 charge-off this year so I just went to the loan details and all the information was displayed accordingly. If you have a series of loans than Excel may be your best option.

  27. Hal P says

    Reading this entire thread is really fantastic. Really appreciate the insight both experts and novices are giving.

    I am wondering whether there is a way of using unrealized capital gains to limit the impact of the unnecessarily high tax burden when there are significant chargeoffs (capital losses beyond the $3k deductibility limit). If, at some future point, I am sitting on a ton of LTCG (in my normal stock investment account) and I have a significant amount of chargeoffs in a tax year, does it ever make sense to sell investments with unrealized LTCG (and either pocket the cash and invest elsewhere or take a basis stepup)?

  28. Boatguy says

    Sure. That kind of tax trading goes on all the time.

    Stock A has a realized loss, Stock B has an unrealized gain, so you sell B and use the loss from A to offset the gain in B and save on your taxes.

    But the wash rule prevents you from going back into B in less than 30 days.

    • CA-Lender says


      Yes that a perfect strategy.


      The wash sale rules wouldn’t apply to GAINS. You can sale a stock with a gain, and buy it back 10 seconds later, and the gains are reported and can be used to offset capital losses.

      Wash sale only applies if you have a capital LOSS–if you buy the same (or similar) holding within 30 days, the loss on the original sale is deferred, until you sale the newly acquired security.

      • says

        CA-Lender, Thanks for continuing to chime in here. For those of you new to this topic CA-Lender is a long time p2p lending investor who is also a CPA. While obviously nothing he says should be construed as official taxation advice his feedback is very helpful to everyone, myself included.

        • Boatguy says

          Which begs the question regarding after tax returns. CA-Lender noted above that the IRS may take as much as 80% of the gains, which was my experience in 2012.

          How do you achieve a decent after tax return in a taxable account given the tax treatment of the current P2P lending structures?

          • CA-Lender says


            The few options I can think of to achieve reasonable after tax ROI in P2P lending is (a) invest more in higher grade notes, with fewer charge-offs, (b) have a investment portfolio that produces capital gains that can absorb the charge-offs (c) look into selling some of your aged notes on Foliofn, with a gain, which would produce a small capital gain.

            None of those options are ideal.

            The only ideal option is for the P2P industry to lobby to have the tax code changed to more fairly tax P2P NET income, by reporting the charge-offs in the net OID amount.

  29. green28 says

    I am horrified that I have I have invested a huge amount of my net worth with Proper. My tax burden for 2012 is more than my net income for the past 2 years. Could CA-Lender please contact me so I can hire him to get me out of this mess PLEASE! My email is My CPA is totally confused and I am desperate!

    • CA-Lender says


      I just sent you an email. I’m not sure if I can help you “out of the mess”, but I can help you report your income correctly. Unfortunately, numbers don’t lie and like I used to tell my clients “I’m an accountant….not a magician”


      • Davis says

        i have a concern that we may not be figuring the tax issue with P2P lending right.
        and it has to do with the prospectus of both lending club & prosper
        in the section of lending club prospectus ‘Taxation of Payments on the Notes’

        “The Notes will have original issue discount, or OID, for U.S. federal income tax purposes because the interest on the Notes is not unconditionally payable by LendingClub, but rather payments are made to the investors to the extent payments are received by LendingClub on the corresponding member loan. A U.S. Holder of a Note will be required to include such OID in income as ordinary interest income for U.S. federal income tax purposes as it accrues under a constant yield method, regardless of such U.S. Holder’s regular method of tax accounting. If a Note is paid in accordance with its payment schedule, which will be available on the holder’s
        account page at, the amount of OID includible in income by a U.S. Holder is anticipated to be based on the yield of the Note determined net of the 1.00% service charge, as described below, which yield will be lower than the stated interest rate on the Note. As a result, the holder will generally be required to include an amount of OID in income that is less than the amount of stated interest paid on the Note. On the other hand, if a payment on a Note is not made in accordance with such payment schedule, for example because the borrower member did not make timely payment in respect of the corresponding member loan, a U.S. Holder will be required to include such amount of OID in taxable income as interest even though such interest has not been paid.”

        a yield to maturity value rather than an annuall percentage rate to come up with a whole new amortiziation table for the loan,

        • CA-Lender says


          I’m not sure if I follow your question—
          I’m not sure how LC reports OID (I don’t invest with LC), but Prosper computes the OID and reports it as one total amount on your 1099-OID. The OID computation is much more complex then, say, computing interest, so, it is quite possible that both LC and Prosper are computing the OID incorrectly (hence, the two “Corrected” 1099-OID Prosper issued for 2012), but whatever they compute and report, that is what you should report on your tax (unless, you know they are doing it wrong, which is a different discussion). It’s fairly simple from our (the lender) side.

  30. says

    I haven’t seen any discussion of the proper tax treatment of notes purchased through FolioFN which then pay off early for less than the amount of income on 1099 OID when the note was acquired. Is that another Schedule D capital loss?

    • says

      That is a new one for me. Hopefully CA-Lender will chime in because I really don’t know the answer to that. You could also post that question on the Lend Academy forum – there are some CPAs on there as well.

      • CA-Lender says

        Ah, Peter—

        Putting me on the spot (j/k)…I just read Jim’s the question.

        If I understand the question correctly, I do not think this would be a Schedule D transaction, but the lower amount of income (interest) should be reflected in a lower amount in the 1099-OID.

        The only time a note purchase on FolioFN would be reported on Schedule D, is not when it’s paid off early, but if it’s never paid off (ie charged off).

        In other words, I don’t think there is any separate reporting required on the taxpayer’s part, it should all be already reported by the payer (ie Prosper or LC).

        Disclaimer: This is not to be construed as tax advise, just my professional opinion.


  31. says

    How about prematurely paid off loans? Would you also report those losses on the 8949 and the Schedule D? I have two notes (purchased from Folio) from which I received some principal and interest payments, but I still lost (paid more for them than I received). Will those interest payments be considered income, even though I lost money in the long run? Thanks!

    • says

      I am not an accountant but I can give you my opinion here. You would report the interest payments received as income but you would report the sale price and cost basis on your Schedule D where you would be able to write off the difference as a capital loss.

      • Jonathan Karas says

        Thanks for your response, Peter. That’s what I was thinking. It’s only about $1.90, so I was thinking of just letting it go, but I’m so peeved that those people paid their loans off early that I want to report my loss! lol…I only have 26 notes; that’s already 7.5% of my notes paid off early. Much better than defaulted, though.

  32. MR28 says

    This is my first year filing taxes related to lendingclub. I have read through several posts and wanted to get input to see if I got this right. Please help…

    Are the following correct for each of the Charged-off loans:

    LC [Date of Acquisition] = Tax [Data Acquired]
    LC [Date of Disposition] = Tax [Data Sold]
    LC [Principal Loan Balance at Charge-Off Date Net of (Discount) / Premium (A+B)] =Tax (Cost Basis )
    Sales Proceeds = 0

    • CA-Lender says


      I haven’t been keeping up with this post, and I do not know if LC reports their charge-offs differently then Prosper (I don’t think they do), so with that disclaimer said, your first 2 items (the dates) and the last item (proceeds = 0) are correct.

      However, the 3rd item that you wrote is not that complicated—I didn’t even really understand what that formula is, but the Cost Basis for tax purposes is the BALANCE OF THE NOTE that was charged-off. Period. It’s that simple.

      Here’s an example (over-simplified, but to the point):

      You purchased a note on for $100, during the year you receive $40 of payments, $30 of which was interest (OID to be exact) then the note was charged off. On your taxes you would report $30 interest on Schedule B, and a $90 “Bad Debt” (Capital Loss on Schedule D)


      • says

        Thanks CA-Lender, I really appreciate you continuing to chime in here. And MR28, just so you know CA-Lender is a CPA although he is obviously not providing official tax advice on here just a guide to help all investors.

  33. GLai says

    Hi, I read this entire blog but am still confused. Can I simply report onto my Form 8949 as is stated on the Form 1099-B. (i.e. Chargeoff: Sales Price – $0, Cost – $50, Recovery: Sales Price $50, Cost – $0)


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