Lending Club and Prosper Tax Information for 2014

[Disclaimer: I am not an accountant nor am I qualified to provide tax advice. This post merely shares how Lending Club and Prosper are presenting their tax information this year. You should seek professional advice before taking action on any of the ideas presented here.]

I know I am late with the tax post this year and I apologize. I am filing an extension and have only just got my own tax situation sorted out. I also want to give a big shout out to Lend Academy intern, Nick Armstrong, who did a lot of research for this post and helped put it together.

It was Albert Einstein who said, “The hardest thing in the world to understand is income taxes.” This seems to be especially true with regards to p2p lending. Pairing an extraordinarily complex tax code with a burgeoning young investment model that is not specifically addressed by the IRS can make filing taxes challenging to say the least. This post attempts to bring a little clarity for investors in Lending Club and Prosper.

Lending Club Taxes

A welcome change at Lending Club this year was the introduction of a five-page tax guide. This helpful guide provides a general overview of the documents LC provides. It explains which investors will receive which forms, what information is included and lays out what information is reported by LC to the IRS. This information is helpful both to individuals filing their own taxes as well as tax professionals who might not be familiar with Lending Club.

Lending Club does a good job presenting the pertinent information succinctly in the following tables. If you want to know what forms you should have received take a quick look here (click on any of the graphics below to view a larger image).

Lending Club tax summary

Lending Club also discloses what information they are reporting to the IRS

Lending Club reported info to IRS

Lending Club breaks down the difference between the 1099-B they furnish (and report to the IRS) regarding recoveries and sales of charged off loans and what FOLIOfn supplies to the investor and IRS if there is participation in the secondary market. Essentially, the difference between these boils down to whether money was recovered by LC’s collections or if the loan was sold through FOLIOfn.

Finally, LC discusses cost basis in terms of tax implications. There are multiple approaches available to taxpayers to treat discounts and premiums when buying notes through FOLIOfn. According to the guide, “some taxpayers may have elected to take an alternative treatment to the embedded Note discount or premium. In any circumstance, we recommend that you consult with your tax advisor to determine your specific tax basis in such a Note.”

The Changes for 2014

The biggest change this year is that LC has consolidated all of the 1099s together in one PDF package, which makes referencing or mailing your statements easier than in years past. Again, 1099s are only available online and hard copies will not be mailed to investors. If you do not have a link to your tax statements, this means you have tax-free account such as a Roth-IRA or other retirement account.

Last year LC sent out revisions of investors’ 1099s toward the end of February. This year they made one minor change but captured it within a day or so. And they notified everyone who had downloaded the incorrect 1099 so if you didn’t hear from them you are ok.

1099-OID – In 2012 LC itemized the Original Issue Document (Interest Earned) on a note-by-note basis. For the 2013 tax year they have consolidated the investor’s OID into one amount on the 1099-OID. The “Total Original Issue Document Activity” amount should be reported on your income tax return as interest income.

Lending Club 1099-OID Example

1099-MISC – This is the same as last year and only investors who have received payments, incentives, or bonuses from Lending Club will receive this form in their tax statement. There have been no investor bonuses for some time so you probably did not receive this form as part of your 1099 package.

1099-B – This form indicates any recoveries from charged-off loans or any proceeds from the sale of such loans. See the information on FOLIOfn below.

Loan Charge Off Detail – This information is not reported to the IRS, but is helpful in completing your 1040. Loan charge offs were a hot topic of discussion on the Lend Academy forum last year as every investors wants to deduct all of their charged off loans.

Notes that have been charged off are treated as capital losses on your 1040. For those of you who took advantage of the bullish market in 2013 and are reporting capital gains from the sale of assets can deduct the losses from charged off notes. According to §1211 and §1212 of the tax code, if once the investor has gone through the capital gains/loss netting process, there are remaining losses, those can be used as a deduction against your regular income up to $3,000 (or $1,500 in the case of a married individual filing a separate return). This is especially of interest to those investors who invest in higher risk-return notes and typically have a higher default/charge off rate.

Prosper Taxes

To find your Prosper tax statements you need to login to your Prosper account, click on the History Tab and then Statements. If you do not see a link to your Consolidated form 1099 then you have a non-taxable account at Prosper, so you can ignore all the Prosper tax information below.

Prosper Example 1099-MISC

Prosper’s tax document package differs in a few ways from Lending Club. First up is the 1099-MISC. This is where Prosper records the late fees that you have received throughout the year. This is additional income so it must be reported to the IRS. Above is my form 1099-MISC.

Prosper 1099-B

Next is the 1099-B. Where LC splits long-term and short-term losses up into different pages, Prosper consolidates everything on the same form with long-term and short-term totals at the top of the first page. Now, the title of the columns in the above graphic are IRS standards, this does not mean your loan was sold. The Total Sale Price actually includes payments that were received by Prosper after your note was charged off.

The difference between the short-term and long-term amounts is while both are reported on the IRS form 8949, short term gains are reported in Part I with Box B checked and long term proceeds are reported in Part II with Box E checked. After the 1099-B summary, you will see a list of all the charged off loans that occurred in 2013 – keep in mind that same $3,000 limit applies to deducting your losses.

Prosper 1099-OID form

The last document from Prosper is the 1099-OID. Prosper and LC are in alignment on their 1099-OIDs. Keep in mind that the term “Original Issue Discount” is a standard IRS term and there is no “discount” in play here. This number just records your total interest earned for 2013. The amount included on your 1099 is net of service fees and collection fees.

If you sold more than $10 worth of notes on Prosper’s trading platform then you will receive a FOLIOfn 1099-B. This form typically comes later than the regular Prosper 1099, it was available by late February this year.

FOLIOfn consolidates almost all the information the tax payer needs on the first page of their tax sheet. Information for the 1099-DIV, 1099-INT 1099-B, and 1099-MISC are concisely displayed, although most of those won’t apply to secondary market investors. The primary information comes on subsequent pages where FOLIOfn lays out proceeds from sales of notes and what gain and loss you have realized. There is still no consensus on how these numbers should be reported on your tax return so you should consult with a tax professional for guidance.

A Word About Deducting Losses

Many investors complain about the undesirable tax treatment for p2p lending. This is true to an extent which is why a non-taxable account, such as an IRA, can be preferable to many investors.

Here is the kicker about unfavorable tax treatment that I touched on earlier. You can only deduct $3,000 in capital losses, in our case these are called charge-offs, each year regardless of how much interest you made. You can however deduct more than $3,000 if you have capital gains elsewhere.

In my own situation, I had a total of almost $10,000 in charge offs in 2013 and I am able to deduct all these losses because I also sold some stocks last year which resulted in significant capital gains (more than $10,000). But if you have no capital gains elsewhere then you are stuck with this $3,000 limit. It is my understanding, though, that you can carry the losses in excess of $3,000 into future tax years.

Hope this information is helpful. Keep in mind, though, as I said at the beginning of this article that nothing here should be considered tax advice – you should always consult with a tax professional before taking action on anything in this article.

Useful Links

Lending Club Tax Form Guide

Lending Club’s Tax FAQ Page

Your Lending Club Tax Statements (must be logged in to your Lending Club account)

Prosper Tax FAQ Page

Prosper Statements (must be logged in to your Prosper Account)

Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech.

LendIt Fintech conducts three conferences a year for the leading fintech markets of the USA, Europe, and Latin America. LendIt also provides cutting-edge content all year long via audio, video, and written channels.

Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.

Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.

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Apr. 10, 2014 5:18 pm

Peter, even though you had Cap Gains that your losses offset, I’m wondering if your stock gains were Long Term gains? In that case your losses offset gains that were taxed at a lower rate than the interest you earned on your Lending Club account was. So there really is a disadvantaged tax treatment of losses even if you can claim them all.

Also curious if you or someone else can explain why LC broke losses into Long Term and Short Term when last year it was recommended to treat all losses as Short Term? Short Term Losses will offset any Short Term Gains first (which are taxed at your ordinary rate).

Feb. 21, 2015 1:02 pm

I’m trying to do my taxes, and I don’t understand the 1099-B that Prosper has sent me.
The form shows an amount of 80.51 in box 1e. There is an attachment with 3 line items, the total of the values under the heading “Amount” total to 80.51, that’s all fine.

What they are not telling me is the value for box 1d, “Proceeds”. TurboTax wants values for boxes 1a-1e to complete their form.

I called Investor Services, and all I got is “We can not give you tax advice.”
Are these numbers available somewhere in the monthly statement from the time of the transaction, or somewhere else?

Feb. 16, 2016 8:39 pm

On capital gains loss limits of $3000 joint or $1500 if filing separately I would like consider an option.

I am not looking for tax advice(god forbid) but more of a hedge strategy.

This year my portfolio has grown and I have net capital losses of $804. As I continue to grow my portfolio the charge offs will continue to grow and will eventually reach the $3000/$1500 wall.

My after tax interest percentage will continue to get smaller(thinking ahead) as I speed past this loss limit. I do not like that to say the least.

Could I sell part of my portfolio to increase the proceeds? The proceeds from the sale would then be more or less tax free (I guess).

Selling parts of the portfolio short however would also produce more losses but hopefully less after tax losses.

Has anyone considered a math model say on selling notes that are mature(month 30 to 35) to receive proceeds that would offset charge offs in excess of the $3000/$1500 tax limit.

I perceive the answer to be no. I guess I need to get better at bonds and stocks or just suck up the shrinking after tax growth of my income.

Do banks executives have this problem? I guess if they did the law would have been changed by now.

This also makes me nervous about recommending P2P to others who are not financially savvy.

Apparently you can carry losses forward. But if looses only continue to grow every year then the after tax income percentage continues to shrink.

Peter Renton
Feb. 20, 2016 6:27 pm
Reply to  Bob

Hi Bob,

A couple of points:
1. You can sell your portfolio at any time and there are many people who do this. But most of your gains will still be ordinary income if you hold for 30+ months.
2. You are assuming you will never have any capital gains from any other kinds of investments. A diversified portfolio should have a range of investments some of which will likely provide capital gain.

Regardless, I have always said that P2P lending investments are best held in an IRA. Then you can completely ignore the tax inefficiencies.

Josh S
Josh S
Oct. 7, 2016 7:58 am
Reply to  Bob

Bob makes a great point here. I don’t know of any other investments where gains are taxed one way (as interest), yet losses on that same investment vehicle are treated another (as capital losses). Even worse, LC reports those capital losses based on the holding of the note (about half the time, it’ll show as a long term loss). It’s unclear if the “bad debt” rule can be used to convert them all to short term losses, since technically LC is the one lending the money, and is the one who is owed – you’re just holding an SEC-registered note which is backed by LC’s performance in recovering that debt.

So you’re holding an investment where any gains are always taxed at your top rate, yet losses (which are plentiful) may only offset 15% gains if you’re so lucky to have them, and are capped at only $3,000 if you don’t. Oh, and also, you have no control over when your losses occur (unlike equity trading when you control the “sale” timing).

The tax code clearly doesn’t have a proper way to handle P2P investments. Any LendingClub portfolio over $60,000 is going to run into this problem and, frankly, small and medium investors are getting unfair tax treatment. Sure, you can say investors should also be investing in equities (note that LendingClub prides itself in being a “safer alternative”), but that doesn’t mean they’re going to be successful every year to generate thousands of dollars in realized stock gains. They can *hope* to have a really good stock year to finally claim any carried-over losses, but that’s just nonsense.

Reporting gains as OID interest isn’t effective. Technically, the tax code says LC doesn’t have to (and originally didn’t) report OID interest unless it was over $10 per note per year. Even your most successful $25 and $50 notes are only generating $5 to $9 a year in interest. Sure, an investor *should* report their aggregate amount whether it’s reported or not, but I just use this to highlight how OID interest was never intended for micro-investments like P2P. It’s clear LendingClub was pressured to “voluntarily” report small amounts.

So what’s the answer? It would make far more sense (and become fair) if the returns on each note were treated as capital gains somehow, or even if they were paid out as distributions (to at least get qualified dividend status on long-held notes). Or perhaps chargeoffs should not be treated as capital “sales,” but somehow reflected in the net OID interest reported. Wouldn’t that be nice? Plop one amount on 1040 line 8a (interest) and you’re done! I don’t know, LendingClub’s hands are tied by what the tax code dictates, and that has a ways to go to catch up with micro-investments.

My end point: the gains and the losses of any investment should directly offset each other. That is the spirit of the tax code.

Lincoln Fiske Jr.
Feb. 27, 2016 6:30 pm

Thanks very much for the very helpful tax articles and the discussions. Here are some rough thoughts on whether it’s better to do this investment inside or outside an IRA. If we assume there will be about 8% charge-offs, that the charge-offs losses are “bad debt” and therefore short-term capital losses, and if you’re in the 25% tax bracket, and if we assume your capital losses will offset capital gains, then having the investment in an IRA and losing the deductibility of the short term losses would cost 2% (8%*25%) of tax benefit. If you’re earning 8% on the loans, then your after-tax net is 6% in the 25% tax bracket. Taking advantage of the capital losses gives you a net after-tax return of 8%. That’s a hefty advantage to give up in order to have the investment in a tax shelter, and it may outweigh the advantages. Being tax-sheltered gives the advantage of putting 25% more money to work (if 25% is your tax bracket), but if it’s costing you 33% to do this (i.e. the 2% lost tax benefit divided by your 6% net after-tax return), it may not make sense, though using an IRA definitely does save a lot of tax reporting headaches, and that’s a big advantage. I’m no tax expert, so I may well be missing some points here, which maybe someone else can clarify.