Lending Club and Your Income Taxes

Lending Club and Your Income Taxes

Over the past couple of weeks, I’ve been asked by several readers about how to handle your Lending Club earnings and expenses when it comes time to file your taxes. While I’m not a tax pro, I’m always willing to share our experiences, so… Here goes.

Paperwork, paperwork, paperwork

For starters, for all loans originated before 10/14/2008, Lending Club will issue a Form 1099-INT if the total interest received for all of these loans was $10 or more. That’s the good news.

The bad news is that for all loans originated on or after 10/14/2008, Lending Club will issue a Form 1099-OID for each note that generated $10 or more in earnings. Yes, you read that right. You’ll get a 1099 for each note that produced at least $10 in earnings.

If you’re expecting to receive any 1099-INT or 1099-OID forms from Lending Club, you’ll need to log in and click the “Statements” link in the header. Now scroll down the page past all of your monthly statements and you should see a link to your “Tax Statements” – click it and then click to download your 2010 forms.

Believe it or not, despite having invested a fairly significant sum with Lending Club, I didn’t receive any 1099-OID forms this year. The main reason for this is that I keep my notes small, so each one doesn’t generate a whole lot of income.

Last but not least, if you received any other sort of income from Lending Club, such as a signup bonus or referral fee, you will receive a Form 1099-MISC, but only if the total of such payments was at least $600. I believe that this form should have arrived in the mail, but I’m not 100% sure.

Collecting your numbers

Given that I didn’t receive any 1099 forms from Lending Club, I’m off the hook as far as taxes go. Right? Wrong. Whether or not the income is reported to the IRS, you are still legally obligated to pay income taxes on it.

The easiest way to figure out how much you earned during 2010 is to download your year-end statement, which you can retrieve by going through the “Statements” link that I mentioned above. On the first page of your statement, you’ll find your total earnings (loan interest + late fees) as well as your losses.

Unfortunately, the year-end statement lacks one critical piece of information… The service fees paid to Lending Club over the course of the year. To get this information, you’ll need to download all 12 of your monthly and tally up the service fees from each.

Of course, if you track your Lending Club investments in Quicken, you could pull your numbers from there. That being said, I’d rather get the data straight from the source to reduce the likelihood of errors.

Figuring your earnings

Okay, now that you have all of the numbers in front of you, simply add up your loan interest and late fees and subtract off your losses (from loan defaults) and services fees. The resulting value represents your net earnings.

Before moving forward with this number, be sure to subtract of anything that was reported on a 1099-INT or 1099-OID. You don’t want to end up paying taxes on that money twice!

From here, I’ve always just claiming the money that showed up on a 1099 (I actually did receive one 1099-OID last year) plus a lump sum of unreported earnings that corresponds to the net earnings described above minus the 1099-INT and 1099-OID earnings.

In other words, I don’t get into the nitty gritty of claiming earnings, losses, and fees. Instead, I factor all of those things into my net earnings and go from there. I’m not sure if this is the 100% correct approach, but it’s honest and accurate, and I haven’t had any problems thus far.

If you’ve been wrangling with your Lending Club earnings, please share your experiences – along with any tips or tricks – in the comments section.

25 Responses to “Lending Club and Your Income Taxes”

  1. Anonymous

    Lending Club interest earned from the Lending Club borrowers is taxed like regular income same as your wages, salary, and normal interest from savings, CDs or bonds. It is not a capital gain so it does not qualify for the 10% or 15% tax rate.

    I am not sure about the income from making a profit from selling any of your Lending Club notes, if that were to happen. I don’t think many of the notes are sold for profit, but many are probably sold at a discount (slight loss) to original lender. So I guess that is recorded as a capital loss. Plus Lending Club charges like 1% to orignal borrower when he/she sells the note. But I don’t normally sell my notes, so I don’t know much about their tax treatment.

  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

    Travis: I don’t believe your number 1 is correct. You need to report the amounts separately on their proper IRS forms. I don�t use Turbo Tax so I am not really sure, but if you have interest amounts not reported on 1099s, it does not seem like you should report in a 1099 section. If Turbo Tax does not have any other categories I guess I would go ahead and put it under 1099-INT anyway because that is where is would have show up if Lending Club had decided to issue 1099-INT . The important thing is to just get it included in your income to be legal. I would not deduct the service fees from the interest. Report the interest alone as income as required on line 8a of Form 1040 as interest income.

    As far as the service fees go, they could be included as a deduction on line 23 of Schedule A. However, it will only be deductible if this plus other expenses such as unreimbursed job expenses, tax preparation expenses and other investment expenses total up to be more than 2% of your adjusted gross income. And then only the amount greater than 2% of AGI can be deducted. See lines 21-27 on Schedule A and page A-10 of the Form 1040 instructions. Also see page 35-36 of IRS Publication 550, Investment Income and Expenses. So you can deduct the service fees, but you don�t subtract them from the interest reported on line 8a of Form 1040. They go on line 23 of Schedule A. I did not bother with deduction of service fees because I did not have enough of the various misc deductions that would exceed 2% of my AGI.

    The charged off loans, if you believe to be uncollectable, would be reported as losses on Schedule D. See page 56-57 of IRS Publication 550 regarding reporting Non-business Bad Debts as Losses on Schedule D. The IRS states that for each bad debt you must attach a statement that includes 1) a description of the debt and the amount and date it became due, 2) the name of the debtor and the family or business relationship between you and the debtor, 3) the efforts you made to collect the debt and 4) and why you decided the debt was worthless. For example, you could show that the borrower has declared bankruptcy, or that legal action to collect would probably not result in payment of any part of the debt.

    Here is what I did for my bad loan loss following example of advice I got from this website (see item 6)
    http://earlyretirementextreme.com/prosper-taxes-for-debt-sales-and-bankruptices.html

    On Schedule D under Short Term Gains and Losses, I put in Column A: Lending Club Bad Debt Loan ID 466126, Statement Attached. In Column D, I reported the amount as a loss by putting the amount in parenthesis. Complete Schedule D as instructed you�re your other capital losses or gains if you have them. Then I attached to my schedule D, a copy of the 2010 Year End Summary page from Lending Club that shows the Losses amount charged off (in my case only involving one loan), the Lending Club Loan Performance pages printed out for this particular loan where it shows that it was charged off and why with the collection activity, and a statement written by me below that reads as follows:

    Attached Statement to Schedule D � My Name and SSN
    Lending Club Bad Debt for Loan No. 466126 from Lending Club Member 585355

    The debt is a peer-to-peer loan (see attached Loan Listing and Loan Performance for details) where Lending Club (www.lendingclub.com) acts as an agent between the lender and the borrower.

    Consequently I do not know the name of the debtor, but only know the debtor as Lending Club Member number 585355 with Loan No. 466126. Only Lending Club knows the name of the debtor. Also I do not have any family relations to the debtor.

    Please see attached Loan Detail for a detailed description of the debt.

    The original loan was $_25.00____ and the remaining principal is $__20.90___

    The remaining principal became due when the borrower declared bankruptcy on 8/26/10 (see Lending Club collection log in Loan Performance) and Lending Club removed the loan from my lending portfolio which occurred on 12/27/10.

    Lending Club employs a collection agency which has suspended collection activity due to bankruptcy filing by the borrower.

    Since the debt is not collateralized I do not expect to receive anything from the bankruptcy proceeds. I therefore deem this debt worthless.

    Date and My Signature
    My Name
    *******
    I don�t use any tax software, but I do use the fillable e-forms. Then I sent in all the forms and schedules and my attachments by paper in the mail. Hope this helps. Kathy

  4. Anonymous

    Thanks Kathy. Sorry in my previous post, I did not mean to to fill out the actual 1099-INT and 1099-OID form. I am using Turbo Tax and there the following sections to input interest:

    1099-INT
    1099-OID
    1099-DIV
    Interest from Seller-Financed Loans
    Tax-Exempt Dividends

    I wasn’t sure in which of these to add the Lending Club interest.

    Here is what I think I need to do, can you tell me if this is correct:

    1. Look at the year end summary for 2010 total Interest which includes interest made + late fees – charged off loans.
    2. Go through each statement in 2010 and add up total service fees to lending club.
    3. Subtract 2) from 1).
    4. Fill out 1099-INT section in Turbo Tax with value from 3).

  5. Anonymous

    Travis: You don’t fill out any 1099 forms. Those only come from firms paying you the interest, like Lending Club. You just include the interest (including any OID amount) in the interest reported on Form 1040 on line 8a, Taxable Interest. That is if you are filing Form 1040 like I am. You just add it in with any other interest you received from savings accounts etc. Printout any statements or reports from Lending Club that show the interest or OID and keep as documentation for your tax records. Even it you don’t get any 1099 forms for the interest you earned (because they decide they don’t want to issue them because they don’t meet certain thresholds) you still need to report all the interest as income legally.

  6. Anonymous

    I didn’t recieve any tax forms because interest on each note was less than $10. Once I figure out my income, which form should I fill out? 1099-INT or 1099-OID?

  7. Anonymous

    Nickel, on what form are you reporting the overall interest? I figure if I deviate from the 1099-OID that I received from LC the IRS computers would automatically flag my return for an audit. Reading the links provided by Kathy F about Prosper they address 1099-INT income. I don’t think I can list the charged off loans as bankruptcies as her links point out. Thank you.

  8. Anonymous

    Wow, that seems horrible. I was looking at checking out LendingClub, but I’m really not sure if I want to deal with all that paperwork. I definitely don’t need to complicate my finances more than they already are.

  9. Anonymous

    This is super helpful. I would have totally forgotten about my LC investments — I just started in October. And I would have had NO idea how to account for them on my tax form.

  10. Anonymous

    If I read Publication 529 correctly, the service fees that Lending Club charges you to collect interest due on Notes is deductible, but it is also subject to the 2% AGI limit. You must itemize to take the deduction, as it’s reported on line 23 of Schedule A.

  11. Anonymous

    I have both income and losses from Lending Club and Prosper (another peer-to-peer lending site) and I found the following link useful:
    http://www.prospers.org/wiki/Taxes

    I am struggling to having to report a recovery of a loan charge-off from Propser. For some reason they charged off a late loan but the person is now paying a reduced amount every month, so I have to report the recovery amount (which includes principal too) as income so I am trying to record the charge-off amount as capital loss on Schedule D.

    I also found this link helpful- how to report your Prosper loss as bad debt on Schedule D

    http://earlyretirementextreme.com/prosper-taxes-for-debt-sales-and-bankruptices.html

  12. Anonymous

    I still don’t like that it that LC does not put the losses from defaults on the 1099 OID. Using turbotax worksheets I have no place to place the defaults to arrive at the true earnings.

  13. Anonymous

    I am in the same boat as you, but I know of some people, particularly those in states that don’t allow retail p2p investing, that are very active on the trading platform. Their taxes probably are relatively straightforward. But I also know some investors who trade their notes for a profit on the secondary trading platform, and that is where it gets tricky.

    I would love a CPA Lending Club investor to chime in on this.

  14. Peter: Great question on the secondary trading platform, and I’m not really sure. I’m guessing that basis would be the residual value of the note (i.e., the remaining principal balance). I’ve only sold bad notes at a loss to unload them and recover a piece of my investment before it’s too late, so I don’t have any gains to speak of, but I do have some small losses to claim.

    It would get a lot more complex if you bought a note on the trading platform at a discount or premium, received some principal payments, and then sold it off later.

  15. Anonymous

    Boyd: Here is the info from my 1099.
    LendingClub Corporation
    370 Convention Way
    Redwood City, CA 94063
    (888) 629-7606
    Federal Tax ID: 51-0605731

    Nickel, great article and one that people should heed. I have over 300 notes and generated over $1,000 in interest income, but my 1099-OID says $455 in interest on about 50 notes, It would be so easy for me to just report that and claim ignorance, but as I have heard before ignorance doesn’t help you avoid taxes. It only hurts more.

    The only thing you didn’t cover and I know I have seen this question elsewhere are notes sold on the trading platform. What are the cost basis in these notes and are they capital gains or just income? Any ideas?

  16. Steve: What I meant by that is that even if we’re audited, the way I’ve handled the numbers is accurate and wouldn’t result in a change in what we owe (afaik). I just streamlined the presentation by calculating the net and reporting that rather than reporting gross along with expenses.

    They don’t hand out penalties for lack of clarity. They hand out penalties for paying too little in taxes. And since this has to do with income that was unreported in the first place, it seems highly unlikely that this would trigger an audit. If I wanted to screw them, I would just fail to report the income entirely.

  17. Anonymous

    And this is why I gave up on Lending Club… Too cumbersome to work with at tax time. Plus my returns, even though I was mainly invested in A/B/C grade loans, was barely at 4%… Sorry, but I can do better elsewhere and have. My CPA would have had a field day with all of the hours involved with processing all of the 1099’s from LC… no thank you!

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