Title: Not worth the returns after taxes.
Post by: nonentity on February 10, 2015, 11:00:00 PM
Post by: nonentity on February 10, 2015, 11:00:00 PM
Is there a flaw in what I'm doing?
Say you are in the highest tax bracket and you earned 1,000,000 in total interest in your 1099 oid, but you have 400,000 of charge offs. So you have 600,000 net gain for the year.
But you have to pay 50 percent taxes (federal and CA state) on 1,000,000 due to your tax bracket. Now you owe 500,000 and you actually make 100,000 on 1,000,000 interest after taxes and charge offs.
So if you had 8 percent return on a 12.5 million account which earned 1,000,000 in interest but you actually net 100,000, your true return after taxes and charge offs is 0.8 percent.
Of course you can take the 400,000 charge offs as a capital loss, but assume you didn't take any capital gains in 2014.
Now in my personal account the oid interest is 8,000 and my losses is 3,000. My net gain is 5000 but I pay taxes on the 8000. In my 34 percent tax bracket that means I have to pay 2720 on 8000, which means after taxes and charge offs my net gain is 2280. This makes it feel like a 54.4 percent tax rate on the 5000 net gain. If I only had to pay 34% on the 5000 I would have to pay 1700, 1000 less than what I actually owe.
Not worth it. After 3+ years I'm withdrawing my lending club funds and not going to reinvest. Once the charge offs start piling up and eating into your interest, taxes end up killing your gains.
Say you are in the highest tax bracket and you earned 1,000,000 in total interest in your 1099 oid, but you have 400,000 of charge offs. So you have 600,000 net gain for the year.
But you have to pay 50 percent taxes (federal and CA state) on 1,000,000 due to your tax bracket. Now you owe 500,000 and you actually make 100,000 on 1,000,000 interest after taxes and charge offs.
So if you had 8 percent return on a 12.5 million account which earned 1,000,000 in interest but you actually net 100,000, your true return after taxes and charge offs is 0.8 percent.
Of course you can take the 400,000 charge offs as a capital loss, but assume you didn't take any capital gains in 2014.
Now in my personal account the oid interest is 8,000 and my losses is 3,000. My net gain is 5000 but I pay taxes on the 8000. In my 34 percent tax bracket that means I have to pay 2720 on 8000, which means after taxes and charge offs my net gain is 2280. This makes it feel like a 54.4 percent tax rate on the 5000 net gain. If I only had to pay 34% on the 5000 I would have to pay 1700, 1000 less than what I actually owe.
Not worth it. After 3+ years I'm withdrawing my lending club funds and not going to reinvest. Once the charge offs start piling up and eating into your interest, taxes end up killing your gains.
Title: Not worth the returns after taxes.
Post by: stanny2 on February 10, 2015, 11:00:00 PM
Post by: stanny2 on February 10, 2015, 11:00:00 PM
Wouldn't the 3,000 in losses be a capital loss, above the line deduction? That would then lower your tax burden $1,020 @34%...not a CPA, so can't say this is correct.
Title: Not worth the returns after taxes.
Post by: Fred93 on February 10, 2015, 11:00:00 PM
Post by: Fred93 on February 10, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: Lovinglifestyle on February 10, 2015, 11:00:00 PM
Post by: Lovinglifestyle on February 10, 2015, 11:00:00 PM
This issue ($3,000 limit, rising losses, declining life span) concerns me also. I'm putting additional investment on hold while I watch what happens to the lates I no longer want to sell at deep discounts. 2013 and 2014 were/are both over the 3K limit and I have no offsetting gain.
Title: Not worth the returns after taxes.
Post by: mchu168 on February 10, 2015, 11:00:00 PM
Post by: mchu168 on February 10, 2015, 11:00:00 PM
I live in CA and pay 50%+ incremental taxes on investment income too. You are right that the after tax returns are unattractive/too low. Munis offer better risk/reward for taxable funds, imo. I also like some of the leveraged corporate bond CEFs for yield.
I stopped investing in P2P loans with taxable money. I'm only investing IRA money now. Once I retire and move out of CA, I will probably start putting taxable money back into P2P loans.
I stopped investing in P2P loans with taxable money. I'm only investing IRA money now. Once I retire and move out of CA, I will probably start putting taxable money back into P2P loans.
Title: Not worth the returns after taxes.
Post by: Theta on February 10, 2015, 11:00:00 PM
Post by: Theta on February 10, 2015, 11:00:00 PM
Yes, this is a problem for taxable accounts. I think a work around might be to do the investment though a fund. There was a report that LC was going to set up a public closed end fund for their loans so people could easily invest. If they did that then the CEF would be subject to SEC rules Investment Company Act of 1940 and could offset the losses from gains. At lease I think so. I haven't heard anything about the LC CEF since it was initially mentioned in 2013.
Title: Not worth the returns after taxes.
Post by: kya on February 10, 2015, 11:00:00 PM
Post by: kya on February 10, 2015, 11:00:00 PM
i hate to say it but my lc and prosper accounts are just a "hobby" a cef muni fund like men, mmu or vki three of over a hundred make better sense..also sell at a discount to net asset value
Title: Not worth the returns after taxes.
Post by: AnilG on February 10, 2015, 11:00:00 PM
Post by: AnilG on February 10, 2015, 11:00:00 PM
Are you all only investing in P2P lending and not in other investments such as mutual funds, ETF, and stocks? The statement of no capital gains from other investments to offset against capital losses from P2P lending makes me concerned that may be people are not diversified across different investment asset classes.
If last year you didn't generate enough capital gains from other investments to offset capital losses from P2P lending, your portfolio might be unbalanced. P2P lending is still a young untested unproven asset class and shouldn't be more than tiny bit of your total portfolio.
Capital gains is taxed at 15% and interest income is taxed at your ordinary income tax rate. If your effective ordinary income tax rate is higher than 15%, it makes sense to convert some of the interest income into capital gains by selling the notes on secondary market at premium.
If last year you didn't generate enough capital gains from other investments to offset capital losses from P2P lending, your portfolio might be unbalanced. P2P lending is still a young untested unproven asset class and shouldn't be more than tiny bit of your total portfolio.
Capital gains is taxed at 15% and interest income is taxed at your ordinary income tax rate. If your effective ordinary income tax rate is higher than 15%, it makes sense to convert some of the interest income into capital gains by selling the notes on secondary market at premium.
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
Post by: TravelingPennies on February 10, 2015, 11:00:00 PM
I have a buy and hold strategy, so I have almost no capital gains. Also, capital gains are now taxed at 20% in higher tax brackets. Add on top of that an 11%+ CA state tax and the Obamacare 3.8% surcharge, and it makes sense to never sell anything in a diversified portfolio.... never, ever.
Title: Not worth the returns after taxes.
Post by: lascott on February 10, 2015, 11:00:00 PM
Post by: lascott on February 10, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: jpildis on February 11, 2015, 11:00:00 PM
Post by: jpildis on February 11, 2015, 11:00:00 PM
I highly recommend that you research the IRS rules for Contingent Payment Debt Instruments... if you look at the definition of CPDIs and the structure of LC investments, one can make a strong argument that LC notes are, indeed, CPDIs. If you come to that conclusion, capital gains and losses are treated as normal income and will either add or subtract from your OID income.
This is not tax advice and you should always discuss matters like this with a tax professional.
This is not tax advice and you should always discuss matters like this with a tax professional.
Title: Not worth the returns after taxes.
Post by: BruiserB on February 11, 2015, 11:00:00 PM
Post by: BruiserB on February 11, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: bobeubanks on February 11, 2015, 11:00:00 PM
Post by: bobeubanks on February 11, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 11, 2015, 11:00:00 PM
Post by: TravelingPennies on February 11, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: standby on February 11, 2015, 11:00:00 PM
Post by: standby on February 11, 2015, 11:00:00 PM
PennySaved had a nice tax thread last year I used info to help do my filing.
http://www.lendacademy.com/forum/index.php?topic=805.30
The way I look at it, losses come off the top as an operating expense. Until you exceed that I don't think you are going to need to worry about a Capital Loss Carryover.
http://www.lendacademy.com/forum/index.php?topic=805.30
The way I look at it, losses come off the top as an operating expense. Until you exceed that I don't think you are going to need to worry about a Capital Loss Carryover.
Title: Not worth the returns after taxes.
Post by: jpildis on February 11, 2015, 11:00:00 PM
Post by: jpildis on February 11, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: daniel2023 on February 12, 2015, 11:00:00 PM
Post by: daniel2023 on February 12, 2015, 11:00:00 PM
I also was starting to feel this way after working through my taxes a few weeks ago. I am in the 15% bracket, so capital gains/losses do nothing for my tax situation, since they are at 0%. So I am getting hit with taxes on full interest without any adjustment for losses. My self calculated return has been just over 10%, but factoring in taxes on full OID makes me believe my after tax return is closer to 5.5%. While this isn't terrible, I'm thinking it may not be work the added time compared to some mutual funds out there, especially given that my target interest rate on loans is around 18%.
I recently decided to stop new contributions (account just over 11K), and am thinking I will let this be the extent of my play money to see how this stuff pans out. And just in case anyone is wondering about my lower income bracket, LC is less than 10% of my total savings portfolio.
I recently decided to stop new contributions (account just over 11K), and am thinking I will let this be the extent of my play money to see how this stuff pans out. And just in case anyone is wondering about my lower income bracket, LC is less than 10% of my total savings portfolio.
Title: Not worth the returns after taxes.
Post by: mchu168 on February 12, 2015, 11:00:00 PM
Post by: mchu168 on February 12, 2015, 11:00:00 PM
Instead of playing armchair CPA, just use IRA money to invest in LC. What's the big dealio? Don't overthink it.
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 12, 2015, 11:00:00 PM
Post by: TravelingPennies on February 12, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 12, 2015, 11:00:00 PM
Post by: TravelingPennies on February 12, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: rawraw on February 12, 2015, 11:00:00 PM
Post by: rawraw on February 12, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 13, 2015, 11:00:00 PM
Post by: TravelingPennies on February 13, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: BruiserB on February 13, 2015, 11:00:00 PM
Post by: BruiserB on February 13, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: Fee on February 13, 2015, 11:00:00 PM
Post by: Fee on February 13, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 13, 2015, 11:00:00 PM
Post by: TravelingPennies on February 13, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 13, 2015, 11:00:00 PM
Post by: TravelingPennies on February 13, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 14, 2015, 11:00:00 PM
Post by: TravelingPennies on February 14, 2015, 11:00:00 PM
An after tax IRA contribution is an option too. Contribution is not tax deferred but tax deferred income is still good. My previous employer let us put $52k of after tax money into the 401k each year. After I left, I rolled that money into LC.
Just ask yourself, what would Mitt do...
http://www.bloomberg.com/news/articles/2014-09-17/how-to-join-9-000-u-s-taxpayers-with-romney-sized-iras
Just ask yourself, what would Mitt do...
http://www.bloomberg.com/news/articles/2014-09-17/how-to-join-9-000-u-s-taxpayers-with-romney-sized-iras
Title: Not worth the returns after taxes.
Post by: lascott on February 15, 2015, 11:00:00 PM
Post by: lascott on February 15, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: mchu168 on February 15, 2015, 11:00:00 PM
Post by: mchu168 on February 15, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: BruiserB on February 15, 2015, 11:00:00 PM
Post by: BruiserB on February 15, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: Fee on February 15, 2015, 11:00:00 PM
Post by: Fee on February 15, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 15, 2015, 11:00:00 PM
Post by: TravelingPennies on February 15, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 15, 2015, 11:00:00 PM
Post by: TravelingPennies on February 15, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 15, 2015, 11:00:00 PM
Post by: TravelingPennies on February 15, 2015, 11:00:00 PM
Appreciate the feedback, Fee! Just good to know they are easy to deal with. I've never spoken to anyone there as I handled the account opening through the LC website and have just mailed in my contribution each year. It would be awesome if they can make it super simple!
Title: Not worth the returns after taxes.
Post by: rockinray on February 21, 2015, 11:00:00 PM
Post by: rockinray on February 21, 2015, 11:00:00 PM
So let me make sure I understand this... I'm kind of dumb from time to time. 
My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?
Am I understanding this correctly?
My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?
Am I understanding this correctly?
Title: Not worth the returns after taxes.
Post by: rawraw on February 21, 2015, 11:00:00 PM
Post by: rawraw on February 21, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: TravelingPennies on February 21, 2015, 11:00:00 PM
Post by: TravelingPennies on February 21, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: Fred on February 21, 2015, 11:00:00 PM
Post by: Fred on February 21, 2015, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: chasingbread on April 12, 2017, 11:00:00 PM
Post by: chasingbread on April 12, 2017, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: rubicon on April 12, 2017, 11:00:00 PM
Post by: rubicon on April 12, 2017, 11:00:00 PM
Please check out this
http://www.aba.com/Tools/Offers/Documents/Chapman_Regulation_Marketplace_Lending_0317.pdf
Specifically page 90. Lending Club chooses to treat the Notes as Debt.
The Debt Approach also requires that the Operator and the investors treat the Platform Notes as debt instruments issued with original issue discount, or "OID."
Platform Notes treated as debt instruments, and treated as issued by the Operators, would be subject to the OID rules to the extent that interest on those notes is not regarded as "unconditionally payable"—a reasonable assumption given that interest is payable only to the extent received on an underlying Borrower Loan.
http://www.aba.com/Tools/Offers/Documents/Chapman_Regulation_Marketplace_Lending_0317.pdf
Specifically page 90. Lending Club chooses to treat the Notes as Debt.
The Debt Approach also requires that the Operator and the investors treat the Platform Notes as debt instruments issued with original issue discount, or "OID."
Platform Notes treated as debt instruments, and treated as issued by the Operators, would be subject to the OID rules to the extent that interest on those notes is not regarded as "unconditionally payable"—a reasonable assumption given that interest is payable only to the extent received on an underlying Borrower Loan.
Title: Not worth the returns after taxes.
Post by: TravelingPennies on April 12, 2017, 11:00:00 PM
Post by: TravelingPennies on April 12, 2017, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: Fred93 on April 12, 2017, 11:00:00 PM
Post by: Fred93 on April 12, 2017, 11:00:00 PM
Title: Not worth the returns after taxes.
Post by: BruiserB on April 12, 2017, 11:00:00 PM
Post by: BruiserB on April 12, 2017, 11:00:00 PM
Back when this thread started I think Lending Club was just issuing a 1099OID and then gave you a list of your written off notes and you basically had to figure out how to make the adjustment yourself. They didn't issue a 1099B form basically declaring them as Capital Losses. So there was a lot more doubt on how to report these on taxes and I think one could build a better case for interpreting the rules in different ways should the IRS have audited you. However the last few years Lending Club has issued the 1099B forms and even provided their guide to do taxes even though I believe they still disclaim that it is tax advice. You can certainly choose to report things differently than Lending Club recommends, but you should be aware that the red flags will go up when the IRS notices that you had 1099B transactions that you didn't report and they will probably wonder why you adjusted the OID number. Those red flags may cause an audit and then you will get the opportunity to explain to them in person why you decided to do what you did. Let us know how it turns out.