P2P Lending / NFT Lending Forum

Peter wanted to know my thoughts on his tax post.  Of course well written but I have to quarrel with some things.  Generally not Peter's fault, but rather LC and Prosper's since it looks like they gave him incorrect information in several respects. 

Quote

Love the discussion, thank you for posting this.

*goes and gets more wine anyway*

Thanks AmCap, I appreciate your detailed thoughts. Well I am bewildered. I spent a great deal of time confirming with LC and Prosper that I had it correct. But it is clear there is a disconnect. For one, Prosper and Lending Club offer identical investments (from a tax perspective) so you would think that their tax treatment would be identical. Seeing that it is not has always raised a bit of a red flag for me.

What I wish they would do is both hire a tax lawyer, preferably the same one, and get this right once and for all. How hard can it be?

Now, back to my wine...

*burp*

Nice work AmCap, thank you for your analysis.

And I agree with Peter... They are big enough, especially now, that there is no excuse for them not to have taken the appropriate steps in hiring a tax lawyer.

AmCap, what an informative and thorough post! Well done!

Wine time.

As much as I would like to use Section 166 to turn my long term defaults into short-term losses, the statute clearly states that this rule does not apply to securities as defined by 165(g)(2)(C):

For purposes of this subsection, the term "security" means—
(A) a share of stock in a corporation;
(B) a right to subscribe for, or to receive, a share of stock in a corporation; or
(C) a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or political subdivision thereof, with interest coupons or in registered form.

Based on this, I think it's clear LC & Prosper notes are securities.

from: jpildis on March 09, 2013, 10:10:45 AM

I understand from AmCap his discussions of OID, what it is supposed to be and what LC says it is from their prospectus.  But for my charged-off  LC loans, the Interest OID reported for these loans was actual interest received and did not include any accrued interest during the time that payments were missed by the borrower before the loan was charged.  While this may be incorrect reporting of interest by LC, it sure makes it easier for reporting the charge-offs on my taxes.  I don't have to do any calculations per charged-off note to adjust the basis of the notes as was explained in another posting (was maybe by AmCap, not sure).  That threw me off and had me scrutinizing every charge off carefully to figure out the actual interest received versus the interest OID reported by LC, on both the original and revised OID forms issued.  Basically, LC did not include accrued interest and I then figured out that they had deducted the service fee from the interest before reporting it as OID.  Maybe this is why LC is reporting OID this way- to save us a lot of work on calculating the amount of charge-offs to deduct for taxes.  Maybe technically they should not be doing this, but I, for now, am glad they are. Now that I understand all this, hopefully next tax year will go a little smoother. 

Perhaps what they should be doing is correctly reporting OID with accrued interest, then for charge-off loans issuing lenders a report with each charge-off adjusted by accrued interest (this would be a bear for us to figure out for every charged off note) so we have a accurate listing of the losses to report on Schedule  D.  We would be allowed to deduct this accrued interest because it had been included it as taxable interest OID, maybe in the same tax year or the prior tax year. Anyway, as time goes on perhaps the tax reporting will become simpler and more understandable.  And big thanks to Peter, for taking the effort to explain the tax forms for both Prosper and LC.

I'm starting an AmCap fan club.

from: PennySaved on March 09, 2013, 12:49:48 PM

Count me as a member of the AmCap fan club.  I have learned so much from his posts. 

Also more thanks to Peter for finding out that the late fees are now included on 1099-OID.  I had gotten these off my monthly statements for previous tax years and reported them as misc. income.  Now I don't have to bother with that. I can now forget about  the extra $0.20 I was reporting as misc income for 2012 because it should already be included on the 1099-OID.  I know these amounts are insignificant but I want to understand what the heck I am doing on my tax forms and why.  If my LC investments increase in the future, these types of problems and mistakes will cost me more.

I was thinking that now that I have Peter's post, I am finally ready to finish my taxes, but wait!  I just forgot about a problem I saw with my 1099-B from Lending Club.  They had contradictory reporting of my recoveries as short-term and long-term on the same 1099-B form.  I sent them the following email on 2/23/12 to [email protected]    This is the email address given on the bottom of the form to report any problems or questions.  I have not heard anything back (sigh).

Email to Lending Club: This attached Form 1099-B is reporting my recoveries on charged off loans.  It list two short term loan recoveries which total $0.91 and four long term loan recoveries which total $0.99 if you total them by how each note is listed as short- term or long- term in Box 1c of Form 1099-B . However, the form1099-B reports short term subtotals as $1.12 and long term subtotals as $0.78, which conflicts with how the loans are classified in Box 1c.  The grand total is the same, $1.90.  I need to know the correct amounts because I have to report short term recovery amounts on a different part of the tax form 8949 from the long term recovery amounts.    Please advise.   

I went ahead and filled out two Form 8949s for the short and long term recoveries (as basis not reported to IRS) based on the characterization reported in box 1c, not based on the description of the subtotals.  I nearly forgot about this problem.  I guess I could try and call Lending Club on Monday.  I really want to get this tax stuff over with.  Anyone else have this same 1099-B problem?

Regarding LC mistakes on my 1099-B as reported in my above post, I was thinking it did not make a difference on my overall taxes how I reported the totals for this year, plus it seemed obvious that the characterizations of the recoveries as reported in box 1c were correct given length of time between the Date of Acquisition reported in Box 1b and Date of Sale or Exchange reported in Box 1a.  Based on those dates I can clearly see which notes were charged off within a year or not. 

But NO.  After checking my spreadsheet of detailed info I had previously put together on my charged off loans,  the Dates of Sale or Exchange reported for my six note recoveries does not match what is reported as charge off date  in collection log for each of the six notes.  Sigh.  The charge off dates are all earlier than the reported Date of Sale or Exchange on 1099-B.  So does this mean the reported Dates of Sale on Form 1099-B are the dates then notes were sold to collection agencies?  And is this the date I should be reporting on column C of Form 8949 for date sold or disposed?  I had used the charge off date for these loans on Form 8949.   

This also brings up the issue of how can I be declaring these charge-offs as bad debt in the same tax year as I have recoveries for the same notes.  I did not see anything in the IRS regs against doing this, but I can't keep tabs forever on charged off notes to see if and when recoveries might occur.

Interesting, at the bottom of the LC 1099-B, it says if you have any questions regarding 1099 statement to send email to [email protected] or call 888-596-3159. 

On the LC website, it give a different email address.
   What if I have questions?
If you have questions about what data is being reported on the year-end statement or IRS 1099 forms, please email investing@lendingcl ub.com or call (888) 596-3159. Tax questions should be directed to your financial or tax advisor.  Lending Club does not provide tax advice and...

So maybe I need to send my email to the investing@... address.  I wanted to do email because I could then attach the 1099-B.

By the way, I opened a Roth IRA LC account in January (separate for LC account that I am dealing with taxes on).  I emailed the application to the [email protected] as instructed and waited.  Never heard anything.  Then I had to call them and and resend the email to a specific name.  They also went back to find my original email and said it was there, must have been "overlooked".  So I am going to resend the email regarding my 1099-B to the "[email protected] also call them. 

My charge-off dates are not matching the 1099-B sale dates on my six note recoveries except in one case.  The other five sale dates are all the same date, 10/16/12 and don't seem to match up to anything in the collection logs.  Three notes have $0.02 recovery reported on 1099-B but the the reported recovery shown for the note(s) on the LC website is reported as Zero.  Other notes have recovery values on 1099-B lower than the recovery amt reported on the website, but I understand that recovery late and service fees have probably been subtracted from the amount recovered, because these fees are supposedly included on 1099-OID, according to Peter.

Thanks for the discussion posts.  When I view the IRS instructions (http://www.irs.gov/taxtopics/tc453.html), it says that nonbusiness bad debts require a separate bad debt statement to be attached, with extra information on what you tried to do to collect, etc.  Is this really required for LC's charged-off loans?  Is that what everyone is doing?

H&R Block says that you cannot efile either if you have nonbusiness bad debts - likely because of the bad debt statement requirement.

I realized I never wrote-off the charged-off loans from last year, but it was only $100ish so it's not worth doing an amendment.  I may just skip it this year as well for $90ish of charge-offs.

The tax issues with these small loans is ridiculous - think I'm just going to withdraw from LC - I'm only making about 5-6% there anyway.

Alchemista...that makes me sad to hear that tax would cause you to withdraw.  Hopefully we can work to make the tax side no more difficult than if you owned a mutual fund.  Stick with us!

Are you investing with Lending Club or Prosper or both?  Did you read Peter's tax guide?

http://www.lendacademy.com/the-2013-lending-club-and-prosper-tax-guide/

I do my taxes by hand and don't use Turbo Tax.  But people might be willing to any questions if we had more details.  Basically, the 1099-OIDs include all interest received plus late fees minus service fees.  You don't need to worry about any adjustments for accrued interest.  Other posters are arguing that the OID interest should include accrued interest for various reasons, but actually LC and Prosper are not including it.  This is causing confusion.

OID interest gets reported on Part I Interest of Schedule B along with any other interest your received from other accounts.  The total of that interest gets reported as Taxable Interest on line 8A of Form 1040.  Charge-offs of principal from notes, get reported as short term losses on Form 8949.  You can report them in a shorthand way as Peter describes in his writeup with just the total losses with date acquired (a) and date sold (b) as "various".  Report the total chargeoff amount as Cost or other basis in column (e).  Proceeds in column (d) is zero.  Leave adjustment columns (f) and (g) blank.  Report total loss as a negative number in column (h).  For description in column (a) you would put something like Lending Club Note Defaults- Bad Debt.
OR
You can do as I did and report each charged-off note individually on Form 8949. For (a) description of Property, I would write Lending Club Note ID xxxxxxx- Bad Debt Statement attached, where xxxxxx is the specific Note ID #.  For column (b) date acquired, I would put the date of issue of the note and for column (c) date acquired or sold, I would put the date of chargeoff.  Proceeds in column (d) is zero.  Cost of other basis in column (e) is the amount of principal remaining unpaid for that the note that was charged off.  You will have to get the dates and the principal amount charged off from looking at the note history online.  You can also get some of the data from downloading a spreadsheet of data for your own notes.  Leave adjustment columns (f) and (g) blank.  Report amount of unpaid principal per note as a loss in column (h).  Total the losses and report in total column at bottom of page.  I had to report mine on two pages. 

Be sure to check Box C at the top of the page (Form 8949) if you are reporting losses from Lending Club.  Box C is for Short Term Transactions not reported to you on Form 1099-B.  If you are reporting Prosper losses, then according to Peter, they provide these numbers on a 1099-B.  Then you may have to check Box A or B on Form 8949 depending on whether the basis was or was not reported to the IRS. I believe that is shown on the 1099-B.  I don't have Prosper losses, only losses from LC, so I don't know for sure.  Then I attached a generic Statement of Bad Debt to cover an explanation for all the charged off -notes.  I think I provided this in another post, I will have to go back and pull it out.

Onward to Schedule D, where you need to report the short-term loss total from Form 8949 in Part I of Schedule D on lines 1, 2 or 3 depending on whether the loss is associated with Form 8949 checkboxes A, B or C, respectively.  You add these short term losses to any other short term losses or gains you reported.  Then combine them with any long-term gains or losses reported in Part II of schedule D.  Then just keep following instructions for reporting on Schedule D, Capital Gains and Losses.

In second paragraph below is the Statement of Bad Debt I provided to IRS with my 2012 Federal Taxes.  I also provided a table showing them for charged-off note, the Borrower  ID, Loan ID and Note ID, date of loan issue, original amount of note, repayment term (36 or 60 mos.), date of last payment made, remaining unpaid principal, charge-off date and reason for charge-off.  Pub 550 Instructions say for each bad debt, attach a statement to your return that contains:

A description of the debt, including the amount and when it came due.
The name of the debtor, and any business or family relationship between you and the debtor
The efforts you made to collect the debt
Why you decided the debt was worthless.  For example, you could show that the borrower has declared bankruptcy, or that lega action to collect would probably not result in payment of any part of the debt.

So the table I provide along with the attached statement, I feel fullfills the requirement of the IRS instructions in Publication 550 regarding bad debt.  Others may not provide this much detail in their tax return, but absent any specific direction from IRS on reporting losses on charge-offs on peer-to-peer lending notes, this is what I did to cover myself.

Attached Statement for Form 8949, Tax Year 2012
My Name and  SSN

LendingClub Bad Debt on Defaulted Notes for Consumer Loans

The bad debt of $487.80 I am reporting on IRS Form 8949 for tax year 2012 is for 21 notes issued by LendingClub for  "peer-to-peer" consumer loans now in default of payment and charged off by LendingClub in 2012 after unsuccessful collection attempts.  LendingClub (www.lendingclub.com) acts as an agent between the lender (myself) and the borrower. For each loan LendingClub makes to a borrower, it issues notes to individual lenders investing in the loan.

Most of the defaulted notes were issued for loans for borrowers wishing to consolidate existing credit card debt.  LendingClub employs a collection agency which made several attempts to collect payments on the loans.  Loans are usually charged off by LendingClub if payment collection is unsuccessful after 120 days or if the borrower has declared bankruptcy.  All collection activities are noted in the LendingClub collection log notes and payment loan history online.

I do not know the names of the debtors. Only LendingClub knows the names of the debtors. I only know the debtors by their LendingClub Borrower ID, Loan ID and Note ID.    Also I do not have any family relations to any debtor.
Please see attached table for further detail of each charged-off note, which includes Borrower  ID, Loan ID and Note ID, date of loan issue, original amount of note, repayment term (36 or 60 mos.), date of last payment made, remaining unpaid principal, charge-off date and reason for charge-off.

Since the debt is not collateralized I do not expect to receive anything from any bankruptcy proceeds. I therefore deem this debt worthless.  Any amounts of charged-off notes that LendingClub has recovered from these bad debts and reported on Form 1099-B will be reported by me as capital gains on Form 8949 and Schedule D.

LendingClub contact info:  LendingClub Corporation, 71 Stevenson St., Suite 300, San Francisco, CA  94105 (888) 596-3159

My Name _______________________________   Date__________________   
         (signature)

What's the worst that could happen if I don't report anything at all?

If you decide to not report your interest, see IRS Topic 652 - Notice of Underreported Income – CP-2000
http://www.irs.gov/taxtopics/tc652.html "The IRS compares the information reported by employers, banks, businesses and other payers on forms W-2, 1098, 1099, etc., with income and deductions reported on your income tax return. If you failed to report any income, payments, and/or credits (or if you overstated certain deductions) on an income tax return, you may receive a Notice CP-2000."

and see also:
IRS Topic 653 - IRS Notices and Bills, Penalties and Interest Charges
http://www.irs.gov/taxtopics/tc653.html

If you decide to not pay taxes on interest income, then see
The IRS Collection Process- Publication 594
http://www.irs.gov/pub/irs-pdf/p594.pdf

You probably won't have to go to prison like Wesley Snipes, unless you owe the IRS millions.

Happy Lending!

Ah, thank you. I was curious because it seems that many of my cohorts don't file a 1040 at all, and the most I owe on my 1099s is like 100$ or so.

The best thing to do is report all your income and pay your taxes to stay out of trouble.  Do you really want to go through all the headache and hassle of getting caught?  Also, it would be fair to those of us who do pay our taxes to pay your fair and required share.  Our govt needs the money and it is the right thing to do even if the IRS does not take enforcement action first.  This is partly how Greece got into financial trouble.  Too many people dodging their taxes and too little enforcement of payment.  OK, lecture over. 

I want to give the opposite view: screw them before they screw you. Pay nothing until you have to. Admit nothing.

Dont(you know)

So I'm taking advantage of the extension this year and just reading up now, and going to bring back a dead thread.  What do those with expertise think is the appropriate way to handle trading?  If I understand correctly, selling will be a capital loss or gain depending on the discount or markup.  The two situations I have to deal with are buying at a premium and holding to end-of-year, and buying at a markup, holding for several payments, and then selling at a markup.  Any sound advice would be much appreciated.

Quote"> from: AmCap on March 08, 2013, 07:47:47 PM

Hey PennySaved,  I wanted to thank you for your super-knowledgeable post about charge off tax reporting, etc.  Thank you, thank you!  I hope you don't mind if I consider using your form letter template.  You're awesome!      .....Laurie 

from: BruiserB on February 09, 2014, 02:50:28 PM

from: standby on February 12, 2014, 04:55:35 PM

Looking at my Lending Club 2013 Consolidated 1009 Package and Details, I see for the charge-offs that Lending Club has a line at the top that says "Note- Information to Report Charged-Off Notes Have Not Been Reported to IRS on 1099-B".  Fine, but then at the bottom of the listings for the long term chargeoffs where they subtotal the amount, they state "Subtotal Long Terms Transactions for which basis is NOT reported to the IRS- Report on Form 8949, Part II, with Box E checked."

But checking Box E would be WRONG because that is for transactions that have been reported on a 1099-B with no basis reported.  Lending Club did not report the chargeoffs on 1099-B at all. You should be checking Box F, which is for long term transactions not reported to you on Form 1099-B.

Likewise with the short term chargoffs, LC put a note by the subtotal saying "Subtotal Short Term Transactions for which basis is NOT reported to the IRS- Report on Form 8949, Part I, with Box B checked."  Again, WRONG, instead you would report them on Form 8949, Part I, with Box C checked, for short term transactions not reported to you on Form 1099-B.

If I have got this wrong, then please enlighten me.

Thank you to AmCap, Pennysaved, and Peter for all the information. Last year I did the simple adjustment of the 1099OID amount, but I think I have more losses and sales this year and wil have to do the full complex 8949/Schedule D treatment. Peter, are you going to make a 2013 tax post this year (and title it for the tax year, not the current year :-)?

from: PennySaved on February 16, 2014, 08:45:42 PM