Lending Club and Prosper Tax Information for 2017

[Disclaimer: I am not an accountant nor am I qualified to provide tax advice. This post 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.]

Every year we share what investors can expect when filing their taxes if they invested in Lending Club or Prosper loans. Below I share some helpful tax resources from each company, my account performance from 2016 and the tax inefficiency investing through a taxable account.

Filing Taxes on Lending Club Loans

Similar to last year, Lending Club has made the process easy if you use TurboTax to file your taxes. They have dedicated part of the help section of their website to outline the step by step process of how to accomplish the import. If you’re not a TurboTax customer, Lending Club has provided a 2016 update to their Tax Guide for Retail Investors. Your tax documents for 2016 can be found under the “Statements” section of your account under tax statements. The consolidated PDF you receive will include various sections as outlined below depending on your account. Most investors will receive just a 1099-OID and 1099-B unless you sold notes on the secondary market. For investors who started investing in late 2016 it is possible you won’t have any losses which means you won’t receive a 1099-B for recoveries and proceeds from charged-off loans.

In my case I received a 1099-OID and 1099-B. My 1099-OID shown below shows the interest I received from Lending Club notes.

My 1099-B shows proceeds of $151.17. This is the total amount of proceeds I received from charged off loans. The “Cost or Other Basis” is the cost basis for the loans that have charged off. If you take any proceeds and subtract it from the basis you calculate the losses which is broken down by loan in the tax statement and also totaled at the bottom. In my case I had $366.62 short term losses and $980.52 long term losses totaling $1,347.14 in total losses for the year.

The tax guide provided by Lending Club shows clearly where these figures should be reflected on the tax documents you file. The image below shows where your interest should be reported on Form 1040.

While we aren’t qualified to give tax advice, many investors list “Various” on the 8949 tax form when reporting recoveries and proceeds on charged-off loans instead of listing out each individual loan. Below is an example of short-term transaction reporting. You can find more examples in the tax guide.

There are two additional things worth pointing out from Lending Club’s tax guide to help you better understand how the cost basis is reported (important if you transact on the secondary market) and how gains/losses are generally reported.

Note on Tax Cost Basis

Please keep in mind that Notes purchased on the Folio Investing Note Trading Platform may have been purchased at a discount or premium relative to outstanding principal plus accrued interest at the time of purchase, and additional information is provided in order to help you determine the cost basis for transactions involving these Notes. However, investors are ultimately responsible for tracking their tax cost basis. The basis reported on Form 1099 may differ materially from an investor’s tax cost basis, depending on the investor’s personal tax situation. For more information, please consult your financial or tax advisor.

Note on Gains / Losses

Generally, gains and losses from recoveries, sales or charge-offs related to Lending Club Notes are reported for tax purposes as capital gains or losses, rather than ordinary gains or losses. Generally, Lending Club Notes are considered capital assets because they are owned for the purposes of investment (similar to a stock or a bond).

Generally, realized capital losses are first offset against realized capital gains. For individuals, any excess capital losses can be deducted against ordinary income up to $3,000 ($1,500 if married filing separately). Capital losses in excess of this limit may be carried forward to later years to reduce capital gains or ordinary income until the capital losses are fully utilized.

Filing Taxes on Prosper Loans

Filing your taxes if you’re an investor on Prosper is similar to that of Lending Club. Your Prosper tax documents can be found by clicking on “History” under your name. Next, click “Statements”. Prosper provides each document separately instead of a consolidated report. In my case I received a 1099-OID and two 1099-B documents (one for short term and one for long term). Prosper breaks down what documents you will receive on the help section of their website. They also provide other FAQs on filing your taxes.

1099-OID

You will be provided a Form 1099-OID in any tax year that you have interest income on Notes originated in 2009 or later. Income shown on Form 1099-OID will be reported to the Internal Revenue Service and State tax authorities in the event applicable thresholds established by them are met. This form details income reported on Notes that are subject to OID tax reporting. See Questions Related to OID Tax Reporting below.

1099-B

If you sold Notes on the Folio Investing Note Trader platform during the tax year, you will be provided a Form 1099-B from FOLIOfn that shows your sale date, proceeds, and cost basis, broken down into short and long term gains. You will receive a Form 1099-B from Prosper for any Notes that were charged off.

1099-MISC

You will be provided a Form 1099-MISC in each tax year that you receive borrower late fees, referral awards, bonuses, incentives, and so forth. Income shown on Form 1099-MISC will be reported to the Internal Revenue Service and State tax authorities in the event applicable thresholds as established by them are met.

My 1099-OID outlined the interest received of $1,226.42 and below that is my 1099-B outlining proceeds and losses from charged off loans. Although these documents look different than the ones Lending Club provides, the information and how it should be reported on your taxes is the same.

A Note on Tax Efficiency

Since it is tax time many investors use this time to reevaluate investments and asset allocation. We have highlighted this before, but it’s important to remember that the tax treatment on Lending Club and Prosper investments are less efficient compared to other non-fixed income asset classes such as stocks. This is due to the fact that income earned from p2p lending investments is treated as ordinary income.

In addition the maximum capital losses you can deduct is $3,000 for a year (Federal) and any amount over that will be carried forward to future years. On the state level this will depend on where you live. For instance, where I live in Wisconsin there is a $500 limit on the Wisconsin deduction for capital losses. While I remained below the $3,000 federal limit, I now am carrying over losses on the state level year after year since I invest through a taxable account.

Capital losses first offset capital gains. With no capital gains, the losses will be deducted from ordinary income. Depending on your ordinary income tax rate, this means that your capital losses may be offset first by long-term gains that have more favorable tax treatment, usually 15% (depending on your income), as opposed to your potentially higher ordinary income tax rate. Short-term gains on the other hand have a higher tax rate, similar to the ordinary income tax rates (see Capital gains tax in the U.S.).

While each situation is unique it’s worth considering holding your p2p lending investments in a traditional IRA or Roth IRA.

Subscribe
Notify of
12 Comments
Oldest
Newest Most Voted
Inline Feedbacks
View all comments
Pete
Pete
Apr. 4, 2017 8:00 pm

Thanks for this 2017 Taxes Updates. Just want to report my own experience. I follow the instructions on (How to import your Lending Club tax forms to TurboTax). try several browsers but never succeed. I file manually all my Forms.

Mike
Mike
Feb. 1, 2018 8:17 pm

Please clarify something for me as a LC user myself. Something seems terribly off to me…

Say for example you make $10,000 in interest and experience $5,000 in charge-off”s. In this scenario with no other investments involved (i.e. stocks, bonds, etc), am I correct in that only $3,000 of the charge-off’s will counter the $10,000 in interest gains? and the $2,000 will be considered a carryover into next year?

If this is the case, as your account grows, you will be further penalized by charge-offs and the rollover year over year will keep growing. I have to be missing something here, but I just filled my federal and this appears to be how it works, which makes no sense at all.

FYI – I get the benefit to an IRA, but I already maxed the $5,500 limit.

Peter Renton
Admin
Peter Renton(@peter)
Feb. 1, 2018 10:39 pm
Reply to  Mike

While I am not qualified to provide tax advice I can tell you my understanding of the situation. You are correct in that you can only deduct $3,000 of the charge-offs per year assuming no other investments are involved. This does make it a less attractive investment unless you have other gains you can use to offset your losses. This is why for the past several years I have only added new money to my retirement accounts.

Kit
Kit
Mar. 27, 2018 4:19 pm
Reply to  Mike

Seriously. I got so hosed. So Peter–do you know how FolioFN note sales are categorized? If I sell off some of my LendingClub portfolio of notes, will that also be categorized up as Taxable Interest?

Ryan Lichtenwald
Ryan Lichtenwald
Mar. 27, 2018 5:29 pm
Reply to  Kit

Hi Kit, I recommend taking a look at the tax guide that LendingClub provides. I’ve copied two relevant sections from it which may be helpful to you:

What is it? Form 1099-B from Folio Investing shows the proceeds and gains or losses from Notes sold on the Folio Investing Note Trading Platform.

Where is it reported? Information on this form may be categorized as short term or long term capital gains or losses, depending on how long an investor held the relevant Notes. Generally, the short term transactions are reported in Part I and long term transactions are reported in Part II of Form 8949.

Kit
Kit
Mar. 27, 2018 6:11 pm

So I’m reading that to say that notes sales DO classify against “capital gains,” whereas simply collecting interest gets us into the hurt box as “Taxable Interest.” Does it look that way to you? So… maybe a mixed strategy of selling off notes on Folio combined with a healthy amount of charge offs could reduce my tax burden for 2018…?

Joe
Joe
Apr. 30, 2018 11:12 pm
Reply to  Kit

I would like to know if this is true. Taxes on my P2P are confusing and concerning. Looking for strategies to manage it.

Ryan Lichtenwald
Ryan Lichtenwald
May. 1, 2018 7:55 am
Reply to  Joe

Hi Joe, I highly recommend checking out LendingClub’s tax guide linked below. They do a great job of outlining the tax implications related to interest and losses, including what happens if you were to sell notes on the secondary market.

https://resources.lendingclub.com/Tax-Guide-for-Retail-Investors-2017.pdf

Collin
Collin
Apr. 13, 2018 4:34 am

Can anybody clue me in on why, on the Prosper 1099-B, charge-offs have a listed cost-basis, while Debt-sales have a $0 cost-basis (in Box 1e)? It seems like both should have a non-zero cost-basis since money was invested in making the loan.

Eve Mathews
Eve Mathews
Mar. 3, 2019 12:01 am

We have a 1099-oid from Lending Club showing interest. We had our taxes professionally prepared last year and he showed the interest on Schedule B and then an OID Adjustment in the same amount as a negative which zeroed out the interest effect. Why would I show and OID Adjustment for Lending Club and basically not claim that interest? (Please do not refer me to Publication 1212).

Nirv
Nirv
Mar. 22, 2019 4:21 pm
Reply to  Eve Mathews

Can anyone comment on this? Why cant the charge off losses be used to offset the OID interest income?

PlatoraBank
PlatoraBank
May. 26, 2019 1:25 pm

Does anybody know any TAX ATTORNEYS that specialise in doing P2P Lending (Lending Club and Prosper) Tax Preparation ?

The Tax Filing of P2P Lending seems like a Mine Field.
Many Tax Accountants and Tax Attorneys do not have the know-how to do the Work.