[Update: This post was written in 2012 and in 2013 Lending Club changed their policy to include all notes on their 1099-OID, not just those notes that earned at least $10 interest. You can read the 2013 Lending Club and Prosper Tax Guide here.]
This past weekend I spent a good couple of hours working out my taxes for my Prosper and Lending Club accounts. The process is actually pretty simple once you know what to do but it is figuring out where everything goes that takes time. Hopefully this guide will help.
Of course, before I go on I need to point out that I am not a CPA and so this should not be construed as tax advice. You should always consult a tax professional before taking action on any advice presented here. To be clear, everything discussed in this post only applies to taxable accounts – if you have an IRA account at Lending Club and no other p2p lending investment you can ignore this post.
The process for doing your taxes for Lending Club and Prosper is pretty much the same. Both companies record their data a little differently but both provide helpful year-end statements that contain most of the information you will need. However, there is a small challenge that affects Lending Club investors.
The Problem with the Lending Club 1099-OID
My main taxable account at Lending Club had almost 600 notes on December 31st, 2011 and I received $1,346.79 in interest on these notes in 2011. But when I received my 1099-OID from Lending Club it showed that I had earned just $13.63 in interest from just one note. What gives?
Lending Club will only include in your 1099-OID interest on notes that have earned more than $10. This means that if you have just $25 or $50 notes (as I mostly do) you will likely never earn more than $10 in interest on any one note in a given year.
Also, if you are not reinvesting and have mostly older notes in your portfolio these notes earn less interest than newer notes. So it is possible you received a 1099 in 2010 but no 1099 this year because no note earned more than $10 in interest.
You Probably Need to Ignore Your Lending Club 1099-OID
Lending Club is adhering to the letter of the law when it comes to issuing your 1099-OID. Unfortunately, the information contained on this form is pretty much useless for you. You need to report your total income received from Lending Club, not just those notes that earned $10 or more.
So unless you only have high value notes (say $250 or more) then most likely your total interest earned will not match your Lending Club 1099-OID.
You May Receive Three Different 1099’s
This year I received three different 1099’s from Lending Club. Let me explain each one here:
1099-OID – This is for interest and as I said above only includes the amounts from those notes that earned $10 or more in interest.
1099-B – If you used the Lending Club trading platform to sell notes during 2011 then you will receive a 1099-B. This details all your transactions with dates, cost price, sale price and whether it is a long term or short term gain.
1099-MISC – Lending Club offers promotions from time to time for investors and if your gain from these promotions exceeds $600 then you will receive a 1099-MISC form. This should just be treated as ordinary income.
Prosper Makes Your Taxes a Little Easier With Their 1099
Prosper handles their 1099-OID differently to Lending Club. Instead of just including interest from notes that have paid more than $10 in interest, they include the total interest earned from all your notes as long as that total is at least $10. This does make the process a little easier for investors.
However, for Prosper trading platform accounts they don’t provide all the information you need on their 1099-B. If you sold notes during the year you will have received a 1099-B that will show your total proceeds from the sale of your notes.
Unlike Lending Club’s 1099-B, Prosper does not provide your cost basis nor your date acquired so you cannot tell from the 1099-B whether you have made a short term or long term gain. The good news is that they do provide this information on their Year-End Statement, which you must download and review in order to do your taxes accurately.
Yet Another Kind of 1099 – The 1099-INT
Yes, there is another kind of 1099 form that some investors may receive. Those investors who held notes that were issued prior to SEC registration will receive a 1099-INT. For Lending Club investors that means notes issued prior to October 2008 and Prosper investors it means for notes issued prior to 2009.
Pretty much all these loans are now mature since they were all three year loans issued prior to 2009, so this will likely be the last year that any investor will receive a 1099-INT from Prosper or Lending Club.
How I Calculate My Total Tax Liability
In reality you don’t need to work out your total tax liability, you just need to enter pertinent information into different sections of your tax return. As I said I am not an accountant but this is how I worked out my taxes for my Lending Club and Prosper accounts. You will need your Year End statements from both companies. Also, to obtain the total service fees paid at Lending Club you will need to add this amount from each monthly statement for the year. Depending on your situation service fees may or may not be deductible so I think this step is optional for many people.
Here is where I am putting the different numbers on my tax return:
Total interest earned: Schedule B, Part 1 – Interest
Late fees + any bonuses or rebates: Other Income
Service fees: Schedule A, Line 23
Defaults: Schedule D, Short Term or Long Term Gains and Losses (based on holding period) with an itemized list
Folio sales: Schedule D – Short Term or Long Term Gains and Losses
There is still no standard as to how these investments should be reported – even Lending Club and Prosper say as much in their prospectus. But that is how I intend to file my taxes for Lending Club and Prosper this year.
I would love to hear feedback from others, especially any CPA’s or tax professionals. Are there any places where you disagree with my assessments? Please let me know in the comments below.
Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.