I have read many articles about people unhappy with the tax treatment of lending club.. I am confused. So if you put your money at Marcus you get 2.25 % and you receive a 1099-int and it is taxed as ordinary income. Lending club seems exactly the same except you get a return of roughly double plus you get capital losses. These losses can be used to offset capital gains in stocks. Capital losses above $3,000 have value since they can be written off against stocks. So my take is the tax treatment is the same as a savings account or CD, but the capital losses are a bonus and improves taxes through the 3k deduction and offset against stock capital gains. Am I not looking at this the right way? What am I missing? I have not used LC platform yet but was considering doing so.
I think you have a good grip on how LC is taxed. Some things to think about:
- If you have a lot invested, the interest income can bump you into a higher tax bracket.
- If you have a lot invested and since LC does not withhold taxes, you can be in for a nasty surprise come tax season unless you adjust your W-4.
- If you invested in stocks/mutual funds/real estate instead and held on to it for over a year, you have the advantage of them being taxed at the more favorable long-term capital gains rate.
- I think the unhappiness really stems from a combination of having a large amount of write-offs (bad loans), little to no capital gains to offset, and having to roll over the losses into another year because of the $3k cap.