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LendingClub and Prosper Tax Information for 2018

We share information related to filing your taxes with LendingClub and Prosper for the 2017 tax year.

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[Disclaimer: I am not an accountant nor am I qualified to provide tax advice. You should seek professional advice before taking action on any of the ideas presented here.]

For new investors in LendingClub or Prosper, it’s important to understand the documents you receive come tax time. For existing investors it’s important to be aware of any changes LendingClub and Prosper have made in their documents or the way the information is reported. Over time the documents have evolved, with both companies now providing a tax guide for their investors.

Note that investors who invest through a retirement account do not have to worry about tax reporting. Here at Lend Academy we believe there is a strong case for investing in marketplace lending through a product like an IRA. Here is our 2018 post on that topic if you’re interested in learning more about taxes and marketplace lending.

As you’re looking at the documents provided by LendingClub and Prosper you should understand at a basic level how profits and losses are reported. The interest or income from loan payments is taxed as ordinary income. Losses are either short or long term capital losses. Copied below is how LendingClub summarizes the tax treatment of investing in loans on the platform:

Generally, gains and losses from recoveries, sales or charge-offs related to LendingClub Notes are reported for tax purposes as capital gains or losses, rather than ordinary gains or losses. Generally, LendingClub 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.

Now that you have some background on the tax treatment, we can move into the details on how profits and losses get reported at LendingClub and Prosper.

Filing Taxes for a LendingClub Account

Note: If you plan to use TurboTax to file your taxes, LendingClub has a step-by-step guide on importing your forms here.

First you’ll want to navigate to “Statements” after logging into your LendingClub account. This can be done by clicking your name in the top right of the landing page once you login. On the next screen you will see a menu bar item titled “Tax Forms”. Clicking on the link will take you to another page which will include a link to your 2017 – 1099 Consolidated Package. Linked below your tax document you’ll find LendingClub’s provided 2017 Tax Form Guide. The guide does a great job of outlining which forms you will receive and where you should report this information when filing your taxes. The below table taken from the tax guide shares which forms you will receive. [Read more…]

Tax Efficient Investing and LendingClub IRA Changes

LendingClub offers a bonus for IRA investments and is working with a new preferred custodian.

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[Disclaimer: I am not an accountant nor am I qualified to provide tax advice. You should seek professional advice before taking action on any of the ideas presented here.]

For those looking to invest in marketplace lending or any fixed income investment there is a strong case for doing so within a tax advantaged account. To better understand the reason for this it’s important to realize that income from loans invested with LendingClub or Prosper is taxed at ordinary income tax rates. This means that you will be taxed at the same rate as you would if you currently earn wages as a W2 employee.

Tax rates for 2018 start at 10% and go up to 37% for the highest wage earners. It’s important to understand how this ordinary income affects taxes compared to other asset classes like equities. Generally speaking when investing in stocks, investors are seeking the long term appreciation of assets or dividend income. As an example, the S&P 500 ETF (Ticker: SPY) which tracks the largest public companies has a 12 month yield of around 1.70%, lower than a typical marketplace lending portfolio. Depending on your tax bracket both long term capital gains and dividend income may be taxed at lower rates than ordinary income. For further understanding of tax implications you can look at the tax rate tables of ordinary income and capital gains.

Marketplace lending is unique in that you will almost always have short and long term capital losses. This is because you are bound to have defaults in your portfolio (unless you have a small account AND are extremely lucky). Let’s assume you decide to invest through a taxable LendingClub account. In a given tax year, you are only allowed to deduct $3,000 in losses against your ordinary income unless you have capital gains to offset the losses. Note that this is on the federal level and your state may have different guidelines.

If you have a sizable investment in LendingClub and have no capital gains you’ll have to carry forward any losses beyond the $3,000 to future years. Thus, you are losing out on the ability to deduct some losses in the year you incurred them (assuming your losses surpass $3,000). This drag becomes more significant the larger your account. This is why investing in an IRA account is so appealing for marketplace lending investors. You are not taxed on any income earned from the loans so deducting losses becomes irrelevant.

LendingClub Offering a Bonus for IRA Investors

After understanding the benefits of investing through an IRA it’s worth mentioning that LendingClub offers bonuses for new accounts. The bonuses range from $25 all of the way up to $3,000 and are available on Traditional IRAs, Roth IRAs, SEP IRAs or SIMPLE IRAs. Below are the bonus amounts in place for 2018.

When you setup your IRA account you’ll need to work with a custodian. LendingClub now has a new preferred custodian called IRA Services or ISTC for short. ISTC charges an annual service fee, but this fee is waived provided your account maintains a minimum invested balance of $5,500 in LendingClub Notes.

Conclusion

For investors looking to allocate to LendingClub it is worth considering investing through an IRA. While we’ve presented an overview of the benefits and some details as to why it might make sense from a tax perspective it’s important to understand any tax implications for your specific situation. Remember that you have until April 17, 2018 to contribute to a Roth or Traditional IRA for the 2017 tax year.

If you’re looking to open a LendingClub account, you can do so using our affiliate link.

Congress is Trying to Get the IRS to Modernize

A new bill introduced in Congress will mandate the IRS to make their data available via API

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Most lenders like to request tax return information from a borrower during the loan application process. It is the most reliable way to verify a borrower’s income. To allow this a borrower must fill out and sign a form known as IRS 4506-T: Request for Transcript of Tax Return. This is a manual process still today and one that can slow down the loan approval process.

Back in December 2013 Renaud Laplanche testified on Capitol Hill on small business lending. He was CEO of Lending Club back then and when a Congressman asked Laplanche a question as to how the government can best help he said to make IRS data more easily accessible to online lenders.

Fast forward four years and there appears to finally be some movement on this. Last week Congressman Patrick McHenry (R-NC) along with Senator Cory Booker (D-NJ) introduced a bill that would help the IRS move into the modern age and allow the automated retrieval of tax information through an API.

The IRS Data Verification Modernization Act of 2017 as it is called will require the IRS to create an API that will allow lenders to verify income in real time. Here is what Congressman McHenry had to say about this new bill:

Innovation in financial services has created more convenient and secure ways to meet the demands of American consumers. For financial innovation to succeed, however, Washington must update its information technology infrastructure to keep up with the growth and creativity in the private sector. Our federal government needs to do a better job in updating and securing its technology to make lending more accessible for all Americans. In light of the recent SEC and Equifax breaches, now is the time for Congress to take a leading role in creating a more safe and affordable process so that consumers are protected.  This bill takes a small but important step in that direction by modernizing one of the most important processes in the financial system: income verification.

[Read more…]

Lending Club and Prosper Tax Information for 2016

We help clear up questions related to filing taxes with Lending Club and Prosper.

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Lending Club and Prosper Taxes

[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.]

Filing taxes with Lending Club and Prosper can be confusing since it is different than the tax treatment of most other investments. If you’ve had losses or recoveries in your account you’ll see several different forms provided by Lending Club and Prosper.  It’s important to keep in mind that new investors may not have some of these tax forms since it can take several months for notes to chargeoff. This post will outline information regarding filing your taxes for 2015. We’ll also highlight any significant changes.  [Read more…]

Lending Club and Prosper Tax Information for 2015

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Lending Club and Prosper Tax Information[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.]

When it comes to taxes and p2p lending, things can get quite complicated. This is especially true for new investors as it can be overwhelming to see many unfamiliar forms. The length and amount of forms you have available to download can vary depending on when you began investing and any losses you incurred. There can also be recoveries, which further complicates things. This post will help Lending Club and Prosper investors find the information they need to file taxes for 2014.

Lending Club Taxes

Lending Club has provided an eleven page tax guide, which is much more detailed than last years. I have to give Lending Club a lot of credit for providing a useful tax information guide. It can be found in the tax statements section of your Lending Club account. Otherwise, you can download it from this direct link. The guide explains which accounts will receive certain tax forms, which are outlined below.  These statements should all be available in your account as of January 31, 2015. [Read more…]

Lending Club and Prosper Tax Information for 2014

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[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). [Read more…]

The 2013 Lending Club and Prosper Tax Guide

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[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.

[Read more…]

Dividend Tax Increase Could be a Boon for P2P Lending

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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.

A Guide to Filing Your Lending Club and Prosper Taxes

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[Update: This post was written in 2012 and in 2013 Lending Club changed their policy to include all notes on their 1099-OID, not just those notes that earned at least $10 interest. You can read the 2013 Lending Club and Prosper Tax Guide here.]

This past weekend I spent a good couple of hours working out my taxes for my Prosper and Lending Club accounts. The process is actually pretty simple once you know what to do but it is figuring out where everything goes that takes time. Hopefully this guide will help.

Of course, before I go on I need to point out that I am not a CPA and so this should not be construed as tax advice. You should always consult a tax professional before taking action on any advice presented here. To be clear, everything discussed in this post only applies to taxable accounts – if you have an IRA account at Lending Club and no other p2p lending investment you can ignore this post.

The process for doing your taxes for Lending Club and Prosper is pretty much the same. Both companies record their data a little differently but both provide helpful year-end statements that contain most of the information you will need. However, there is a small challenge that affects Lending Club investors. [Read more…]

How to Setup an IRA for Prosper

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[Update: This post is now irrelevant because Prosper started offering an IRA in 2012. Prior to this you had to jump through the hoops described below. You can read my post announcing the Prosper IRA here and you can open an IRA with Prosper here.]

No one likes paying taxes. But for Prosper investors there has been no alternative but to pay taxes on the interest earned because there is no IRA option available….or so I thought.

I received an email from a fellow Prosper investor over the long weekend that introduced me to the concept of a Prosper IRA. This is not one that is officially sanctioned by Prosper but it does appear to work. Now, it is not cheap and it certainly isn’t easy, but it seems to be completely legal. If you want to make a sizable Prosper investment then you could save a great deal of money in taxes by setting it up this way.

One Prosper investor has gone ahead and done this. His name is Tym and he is happy to share his findings with everyone. Here are his instructions: [Read more…]

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