Lending Club and Taxes

Lending Club and TaxesAfter spending the last two evenings pulling our tax paperwork together, I wanted to share a little tidbit on documenting your Lending Club earnings. Here’s the scoop…

Lending Club tax paperwork

For all loans originated prior to 10/14/2008, Lending Club will issue IRS Form 1099-INT if the total interest received for all of these loans in 2009 was $10 or more.

For all loans originated on or after 10/14/2008, Lending Club issues an IRS Form 1099-OID (Original Issue Discount) for earnings in excess of $10 on a per-note basis.

If you received any other payment from Lending Club, such as signup bonuses or affiliate referral fees, you will receive an IRS Form 1099-MISC if the total of such payments was $600 or more.

So… In the first case, they aggregate earnings on all notes together and report them in a lump sum using a 1099-INT (assuming the total is $10 or more). In the second case, they will issue a 1099-OID for any individual note that earned more the $10 in 2009. This “per-note” business is annoying, but it’s been a legal requirement ever since Lending Club registered with the SEC.

How to get your Lending Club tax info

If you’re expecting either a 1099-INT or 1099-OID from Lending Club, you should be able to download them by logging in and visiting the “Statements & Documents” page (click “Statements” in the page header).

If you have any income from Lending Club that wasn’t reported on a 1099, you’re still required to pay taxes on it. In this case, you should download your year-end statement and get the value from there. This document is likewise available on the “Statements & Documents” page.

Unfortunately, the year-end statement does not list your fees paid (investment expenses are tax deductible). This means that you’ll have to download the individual monthly statements and add up the fee information. I’ve already contacted Lending Club to ask them to add this info to the year-end statement. If you’d like to see this change, I suggest that you do the same.

A word of warning: If some of your income is documented on a 1099 and some of it isn’t, be careful not to pay taxes on it twice. To determine the amount of unreported interest income that you received, take the value on your year-end statement and subtract off the amount reported on your 1099 form(s).

35 Responses to “Lending Club and Taxes”

  1. Anonymous

    This year I down loaded my Tax information which consisted of 11 pages.
    I have participated in Lending Club for 3 years investing over $10,000. I did not invest any funds in the note trading platform website operated by Foliofn Investments, Inc. (Foliofn).
    I have a print out of a 1099-OID. The amount is all interest for 2013 minus FEEs.
    I also received a print out for a 1099-B with Long Term Gains. Also I received print out for a 1099-B with Short Term Gains. It also included 2 print out for 1 forLong Term report of charged off notes (that) have not been reported to IRS on 1099-B and one for short term charged off notes

    I entered in my tax program the 1099-OID amount reported to the IRS in the first line. This I believe is taxed as interest for year 2013. I entered nothing else. It does not include losses from charged off notes.

    I entered” LC CORP NOTE Long Term” in description for 1099-B. I went to the “entry for data” and that took me to Form 8949 so I could enter consolidated information rather that listing each small loan separately. And since the many loan groups listed on the “Lending Club print out” are qualifying sales, I checked yes in box. I asked for advice at this point and this is what I was told to do.
    I “added” the “total amount” that has been reported to IRS on the 1099-B and the “total amount” that is calculated in my “Long Term report of charged off notes (that) have not been reported to IRS on 1099-B”. This figure is put on line for total cost or other Basis. I put on the next line the “total amount” from the 1099-B (Long Term) that was sent to IRS on line for “total sale proceeds”. My Long Term capital gain loss (since my charged off notes dollar total was much larger than the gain amount of my 1099-B amount sent to IRS) is the total amount that is calculated as my Long Term gain/loss for my 1040 1099-B. Holding period is VAR-L (various dates long term) .
    I then did the same think again using “LC CORP NOTE Short Term” as new description with my Short Term (VAR-S )1099-B and “Short Term charged off notes” which both are also printed out on separate forms in the Lending Club print out. This also generated for me a loss from my charged off notes. Does this sound like the right way to proceed?

  2. Anonymous

    This is the correct way to deal with LendingClub earnings:

    Step 1: Retreive your annual statement and get the interest amount off of it

    Step 2: Subtract any OID interest reported on last years taxes (you already paid taxes on this interest last year) for lending club loans from the interest amount in step 1. You will only have OID interest last year if you had lending club loans last year where you followed this procedure. This amount will be your “Other Periodic Interest” that you would normally get on a form 1099-OID

    Step 3: For every outstanding loan you will need to calculate the OID interest and then add them all together. The OID interest is the amount of interest accumulated on the loan but not yet paid as of the December 31st. This is somewhat complicated and time consuming to do.

    Example: A loan has $20.00 of remaining principal and interest rate of 10%. The payment on the loan is due on the 17th of every month.

    There are 14 remaining days from Dec 17-Dec 31
    The daily rate on the loan is .10/365
    The accrued OID interest is therefore:

    (20)*(14)*(.10/365)= .0767 (basically 7.67 cents)

    Beware of notes where the payment was due in one year but not paid until the next. For example if your payment was due on the 29th of December but you did not receive the payment until the 3rd of January you will need to calculate OID amounts for November 29th – December 29th (30 days) plus December 29th-December 31st for that particular note.

    Then you simply add up ALL of these OID calculations for each individual note. This amount will be what would be reported in the “Original Issue Discount” amount on the 1099-OID

    Step 4: Go through your monthly statements and deduct the service fees. You will report this as investment expenses if you itemize deductions and have enough to qualify. This will be reported in Schedule A

    Step 5: If you sold any of your notes on eFolio, there will be a year end tax statement 1099-B on there as well. Although generally correct, you will want to verify that the cost basis they report on this form matches the principal balance plus interest accrued but not paid thru the date of the sale. If it is not you will need to adjust this amount. You will enter 1099-B information in Schedule D.

    Step 6: Any charged-off loans should be written off as a full capital loss. I recommend using the attached statement that Kathy F recommends in the above post.

    Hope this helps.

  3. Anonymous

    Not sure – I’m sure the IRS has pages that document the kind of penalties you might be subject to. For 50 dollars the most likely thing they’d do is send you a letter saying they’d found this income, here’s what you owe, pay up.

    I don’t know if they audit LC’s books and make any effort to compare them to what people are declaring, so I don’t know the odds of getting caught. My take is that even though the income isn’t much, it doesn’t take all that long to figure it all out.

    An interesting article on the tax reporting: http://www.mydollarplan.com/lending-club-taxes/

    They mention that a charge-off should be reported on your Schedule D as a personal bad debt (and then any recovery, in the future, would need to be treated as income in that year). I didn’t know about that last year when I did our taxes – had 20 dollars charged off that I wound up just subtracting from my net LC income.

  4. Anonymous

    I have a suggestion/question for those of you with multiple small($25-$75) loans. Since your loans are so small and it seems like way too much of a hassle to calculate how much you really owe to the IRS once you subtract the LC fees, what are the penalties for not paying these taxes?

    If I invested $500 last year and got a 10% return. I made $50 in interest. I’m assuming that if the IRS does come looking for you, they will charge you for what you should have paid in taxes plus interest plus a small penalty?

  5. Anonymous

    Could one of you kind people post an image of a 1099-OID form which LendingClub sent to you? My understanding is that for loans with less than $10 interest you need to report the interest income in Schedule B. In order not to be flagged for audit, you need to submit 1099 forms which match the total you put down for income. So I plan on filling out my own 1099-OID forms but would like to see what L.C. sends out so I can emulate that. Of course you can black out your personal information, but LC info like “PAYER’S Federal ID Number” and what to put in boxes 1-7 would be very helpful. Do they supply separate 1099-OID forms for each loan with greater than $10 in interest? Or do they lump all interest payments together as if it were one big loan.

  6. Anonymous

    Eric: Publication 1212 (mentioned earlier as well) does indeed discuss how to do this, however for dozens / hundreds / thousands of small loans the task is basically impossible to do without a specialized computer program. I’m fairly tax savvy and I have trouble following the instructions, it’s not reasonable to assume that most investors could do the job. Even if I were to code something that could do it, it would require inputting every single loan and probably every single payment – basically impossible for a human to do.

    To Joey / March, if you *were* to get four 50-dollar loans to stay under the 10 dollar income limit, that doesn’t absolve you of the legal requirement to declare and pay taxes on the income.

    Would the IRS catch you? probably not. But if the IRS does ask Lending Club for a list of investors, and start cross-matching those with tax returns, it WILL catch up with people. I’m surprised they haven’t started doing this, actually.

    Lending Club is really dodging the issue by refusing to provide income information for smaller loans. They have the computer systems in place to do so, and 1.00 in interest is exactly the same thing, to a computer, as 10.00 in interest. I understand capacity is an issue, but at the very least they could run the larger loans earlier (by the 31-January deadline) and make the other loans’ information available for informational purposes some time after that.

  7. Anonymous

    wow i’m really dumb. I have been buying $200 notes that will most certainly be over $10 in intrest. I should have just bought 4 $50 notes and not been taxed.

  8. Anonymous

    Just curious, do you report the servicing fees on any form or would you recommend I reduce my interest earned by the service fees and net them together? thanks

  9. Anonymous

    Thanks for the reference to publication 1212. It looks like calculating this “correctly” would be a NIGHTMARE if you’ve got any quantity of loans at all. I’m really stunned that Lending Club is weaseling out of this reporting for smaller loans.

    I assume that the “redemption price” would be the sum of the expected payments (e.g. 25 dollar loan, 80 cents a month, redemption is 28.80), with a capital gain of 3.80 but reduced by the amount taken as income each year or partial year.

    Unless someone can point me to a tool to do this more easily, I may just stick with my approach of netting out everything and reporting all that as interest income: total interest received, minus fees, minus chargeoffs. It may not be “correct”, IRS-wise, but it definitely won’t understate the income involved and might even put that income in a higher bracket (if a “correctly” handled loan would be treated as long-term capital gains?).

  10. Anonymous

    There’s NO SUCH THING as a tax loophole. If earn $30k peddling drugs or servicing johns for cash, then believe it or not you still owe the IRS income taxes. The question comes down to whether or not they’re going to KNOW you earned the money. To answer that question we have to go back to the Lending Club’s claim that they don’t report your interest… While this is true, they DO report their own service charges… ergo, the IRS has a paper trail, albeit and indirect one, that leads right back to your interest earnings. Best thing you can do is compute your own imputed interest and PAY THE MAN. See IRS Publication 1212 for more information on calculating your OID (imputed interest).

  11. Anonymous

    There is no tax loophole, The IRS specifically states what constitutes as income and also specifically states that you must report all interest income even if you don’t receive a 1099-int or 1099-oid

  12. Anonymous

    Here’s the rub:

    Lending Club (and prosper) don’t tell you precisely BECAUSE it’s a tax loophole in the purest sense. If Lending Club officially states that it IS a requirement, they would be giving you wrong information. If they state that it ISN’T a requirement, then they’re on the hook for your failure to pay the IRS. So: they’re bowing out of it all together. Welcome to the new Gold Rush, gentlemen… The rules aren’t in place yet, and there’s really nothing the IRS can do legally to penalize you. The requirments to pay interest are if the interest received exceeds $10. This is an old law based on old technology that hasn’t been updated. The SEC made it a requirement because their jurisdiction mandates it; however, it is the IRS that never put their 2 cents into the agreement between the SEC and Lending Club. The result??? A tax loophole.

  13. Anonymous

    I know this is an older blog posting but I too am curious. Last year I simply added the interest as an additional payor in Turbo Tax (same as I do for several bank accounts which pay less than 10 bucks a year). I’ll do that again this year.

    BUT: Do people record the sales of notes / principal repayment on their Schedule Ds? Normally there’d be no profit OR loss since it’s “a dollar a share”. However there are the fees, which of course reduce what you get via repayment. So a 25 dollar repayment would really be 24.75, or a capital loss. Or do you subtract the fees from the interest total and report just the net interest income, and ignore the capital loss aspect?

    ALSO: what about loans that have been charged off? I know there’s a way to treat worthless stocks, for tax purposes.

  14. Anonymous

    I am about a year into investing with Lending club and have sold a number of loans on the secondary market – folioFN. I have a year end statement with purchase price, value at time of purchase, sale price and value at sale price. I am having a difficult time figuring out my cost basis on each note.

    can someone help me with figuring out my cost basis on each note?

  15. Anonymous

    I chose not to enter the int that wasn’t on the 1099 since the computer would see a mismatch at the IRS and I only reported the amt on the 1099.

  16. Anonymous

    almost there,

    Thanks for the reply! I guess I wasn’t clear about my situation. The year end statement only reflects the total interest earned for all my 40-odd loans, which adds up to about $25. Interest from any single loan individually is far less than $10, so no 1099 or other tax documents were generated for me.

    I do not know how to proceed. If I report it in Schedule D (to account for fees paid etc.) then I might trigger something since there was nothing reported on a tax-form. Any advice is appreciated.

  17. Anonymous

    Pras, go to your LC account and click on statements. The year end statement is there for the 1099-OID. They no longer issue INT statements. The applicable loans will be combined on the OID, but only the ones that have $10 in interest. See my previous comment.

  18. Anonymous

    HELP!!! This is ridiculous. I have no tax documents from Lending Club, earned some $20 or so in interest after opening my account in November 2009, and don’t know how to declare this in Turbotax. Should I make up an entry for a 1099-INT and put it there? Do I have to go through each loan (there are over 40) and create my own 1099-OID?

    Any guidance will be highly appreciated. I now totally regret venturing into Lending Club, as this is much more hassle than I expected it to be.

  19. Anonymous

    One other question I have, for tax purposes, should the interest received from the notes be treated as interest like you would receive from a bank savings account, or should it be treated as a qualified dividend like you would receive from a long term stock or bond?

    Since each note doesn’t mature for three years, it seems possible to me that the interest from the notes could be treated as a qualified dividend, which has a different tax rate than ordinary interest. But I’m not a tax accountant, so I don’t know.

  20. Anonymous

    I guess I need clarification on the 1099-OID situation. If you have $100 notes divided into $10,000 (which produces 100 notes), if each of them earns 10% (or $10), does that mean you will receive 100 1099-OID statements?

  21. Anonymous

    Can someone write a summary of the meeting? I was unable to attend unfortunately. In particular:

    – Most of my interest is not reported on the OID (since most of my notes are $25-$75). How and where do I report it?
    – What about loan defaults? How are those reported? Are they capital losses, or can I write them off against the interest? (Cap losses are limited to 3K a year against income which is why I ask)
    – just to confirm, fees can be written off against interest earned right?

    Thanks.

  22. Anonymous

    If the LC 1099-OID reflects the interest less their fee, then I could infer that I would report the rest of the LC interest income after deducting their fees. I was assuming I would report the entire interest amount and the fees would be a misc itemized deduction (subject to the 2% rule). Anybody know for sure?

  23. Anonymous

    I wish they would go back to 1099-INT because I was confused when inputting the OID amount into turbotax on how to declare the interest not covered by the tax form along with the bonus income. I emailed (LC) them and they said the 1099-OID reflects each note with over $10 in income with their fees deducted already, as I couldn’t reconcile my notes with over the ten bucks in income with my 1099-OID statement. Since the IRS computers flag a return that does not match the 1099 forms perhaps one should only declare just what was on the 1099 OID form.

  24. Anonymous

    Aha… I didn’t realize that (but it makes sense). Well, it’s still a bit easier keeping it under $10 so you don’t have a pile of 1099’s. I assume I just report the total interest received, and keep a document (probably a screen grab from lendingclub) to verify the total amount of all my notes’ interest for the year.

  25. Anonymous

    Tom: Just because you don’t get a 1099 doesn’t mean the money isn’t taxable. You’re still obligated to pay taxes on the interest you receive. If you’re planning on dodging those taxes, however, you are correct that you will be less likely to get caught if the income is unreported. But is it really worth the risk? I’ve always felt a responsibility to pay the taxes that I owe, but not a penny more. Thus, I look for every possible way to *legally* reduce my tax bill. Just my $0.02.

  26. Anonymous

    This is awesome — if you (like I) invest less than $100 per note, you’ll very likely keep under the $10 in interest per year threshold, and avoid having to report it to the IRS at all.

  27. Anonymous

    Do you know if this same logic applies to loans that are made on prosper.com? It seems to me to be the same type of reporting that would happen, although they may have different policies on when they issue certain forms.

  28. Anonymous

    Did you sit through that horrible meeting that they did on Wednesday? If not, the basic story was that they had some sort of technical issue with the sound, so they invited us to join a bridge by phone. And because they couldn’t mute participants, we got to listen to all the (rather rude, I think) people who had talking in the background. My favorite was the guy who had a dispatcher speaker right next to the phone he was using. ugh.

    I actually found the info quite good, when I could hear. But I really appreciate this summary of tax info as I didn’t manage to really hear the answer to how to figure out income when you didn’t get a 1099.

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