[Disclaimer: I am not an accountant nor am I qualified to provide tax advice. This post merely shares what I have learned from Lending Club and Prosper and how I am doing my taxes this year for my p2p investments. You should definitely seek professional advice before taking action on any of the ideas presented here.]
The tax issue continues to be somewhat complicated for p2p lending investors. Unless you have recently opened your account or have all your investments in some kind of retirement account you would have received a 1099 from Lending Club and/or Prosper this year. This post will try to cut through some of the complexity and explain what all the numbers mean. I will also be sharing how I am doing my taxes for 2012.
Lending Club Taxes
The big change this year is that Lending Club now reports all the interest you have earned on their 1099-OID. In previous years it only included interest for notes where the total interest earned during the year was more than $10. So, if you had a portfolio of only $25 notes you would never even receive a 1099. But legally you were still required to declare all your interest income to the IRS.
Your 1099’s at Lending Club are available in the Statements tab at the top right of your screen. Then click on Tax Statements and you will see the PDFs to download. Important: You will not receive a 1099 in the mail – you must download your statement from that page. If you don’t see a link for Tax Statements that likely means you have a retirement account. Lucky you – you can avoid this whole tax headache.
An Explanation of the Lending Club 1099s
1099-OID – Now, your 1099-OID should accurately reflect your total earnings. Service fees are now deducted from the amount of your 1099 as well. Here is the exact formula for the number in box 1 of your 1099-OID as provided by Lending Club:
1099 Interest = (regular interest + regular late fee – service fee) + (recovery interest + recovery late fee – recovery service fee)
Lending Club issued an amended 1099-OID on February 21st so that the OID amount is now net of service fees, this was not the case in previous years.
1099-B (Recoveries) – This 1099-B was not released until February 21st and it includes any recoveries from charge-offs. If you received a payment in 2012 from a previously charged off loan then you will have a 1099-B. The amount in Box 2a is the net amount recovered less any collection or service fees.
1099-B (Folio) – If you sold any notes on Foliofn, the Lending Club trading platform, in 2012 you will receive another 1099-B. This one must be downloaded from the My Account page on Folio (look under Tax Documents). This documents details all your trades and summarizes them into long term and short term totals.
1099-MISC – Some lucky investors will received a 1099-MISC – this is usually because of a bonus received. I know Lending Club has stopped running investor bonuses these days but they have run them in the past and if you earned more than $600 in bonuses in 2012 you will receive a 1099-MISC from Lending Club.
1099-INT – This form is outdated now because it pertains to notes issued before October 14, 2008. These were all three year loans so they should have reached maturity before 2012. But there were likely a few notes that did have payments in 2012 and these are reported on the 1099-INT form. I didn’t begin investing until 2009 so I have never received a 1099-INT.
Now, in an ideal world Prosper would issue their 1099’s in the exact same way as Lending Club. Alas, we do not live in an ideal world. Prosper’s 1099s are very different. What I do like about Prosper is that everything is in the one consolidated document (other than Folio trades).
Like Lending Club, Prosper does not mail any 1099s – you have to download them from their website. At Prosper you click on the History tab and then Statements and you will see your 1099 there in a list with all your monthly statements. You are looking for the Consolidated Form 1099 dated February 28th.
The Prosper 1099s Explained
As Lending Club did Prosper issued an amended 1099 a few days after the first one. But then just last week Prosper issued a second corrected 1099. You should discard any previous 1099s that you downloaded before February 28th.
1099-OID – This is a very straightforward form. Unlike Lending Club you get no detail here, just some totals. It is at the very end of your Consolidated 1099 so you may need to scroll through several pages to see it. Box 1 is the Original Issue Discount amount for 2012, which is the total interest earned. This number, though, may not exactly equal the total amount of interest you earned. It may be less. Here is an explanation of the 1099-OID from the notification email Prosper sent out last weekend:
We have modified our OID methodology to use actual interest received, less actual servicing fees paid, rather than using a schedule to estimate these values. Your 2012 OID includes both your actual interest less servicing fees received in 2012, plus an adjustment for prior years to bring the methodology into alignment since the inception of your portfolio. In addition, we now have a standardized approach for notes purchased on the secondary market at a premium or a discount that more accurately calculates the reamortization for these not-at-par transactions.
Basically what this means is that long time Prosper investors may have received 1099s that inflated their actual interest earned. If that was the case that amount was deducted from your interest earned in 2012. We are not talking big numbers here. My original 1099-OID showed $8,871 in interest in 2012. My final 1099-OID issued on Feb 28th with this adjustment was $8,799. So, it is less than a 1% adjustment and hardly worth re-filing your return if you have already sent it in.
1099-MISC – Also on the new consolidated 1099 is the 1099-MISC. This form just provides the total late fees received as well as any rebates you might have received. Before this number was included in your 1099-OID total.
1099-B (Recoveries) – Prosper issues a 1099-B that details all the charge-offs as well as any recoveries. There is a useful summary at the top breaking down your gains and losses into short term and long term (a year or longer). The amount that was charged off is included in the Cost Basis (Box 3) column and recoveries are included in Sale Price (Box 2). Now, the title of the columns are IRS standards, this does not mean your loan was sold. For recoveries, these are payments that were received by Prosper after your note was charged off. But the amount included on your 1099 is net of service fees and collection fees.
1099-B (Folio) – This was just issued this week from Folio and is the last piece in the tax puzzle for 2012 taxes. But if your gains on Folio were less than $10, as mine were, then you will not receive a 1099-B from Folio.
How I Am Filing My 2012 P2P Lending Taxes
I have met with my accountant and this is how I will be filing my 2012 taxes. Now, keep in mind there is no agreed upon standard yet for reporting p2p lending income so your accountant may do it differently.
Interest earned from Lending Club and Prosper, as reported in Box 1 of their 1099-OID is included as taxable interest on page 1 of your 1040. I list the totals for each company separately on my Schedule B.
All charged off debts are reported on Schedule D as short term or long term losses. Then I include a separate line on the Form 8949 for both Lending Club and Prosper losses with date acquired and date sold listed as various. I know others who have detailed these bad debts one-by-one with purchases dates and charged off dates but my accountant thinks that is unnecessary.
Gains reported on trading activity from the Foliofn trading market are reported on Schedule D as well, separated into long term and short term gains. The totals are in the 1099’s you received from Folio.
Gains from Lending Club’s 1099-B (Recoveries) as well as late fees received on Prosper’s 1099-MISC are reported as gains on the Schedule D.
While it is not a trivial exercise working out your tax liability for your p2p lending investments, once I knew what I was doing it wasn’t that bad.
More P2P Lending Tax Resources
As I said at the start of this article you should not take my advice without consulting with a tax professional. But if you want to learn more here are some online resources for you:
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.