Author Topic: Tax consequences in FolioFN  (Read 8268 times)

princeb

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Tax consequences in FolioFN
« on: March 21, 2016, 03:30:47 PM »
Just finishing taxes this year, noticed something that is quite upsetting in LC.   My LC strategy is 100% seasoned notes using FolioFN.  Apparently, buying notes at discount from face value is considered an 1099 OID interest payment.  Ie, buying discount notes is considered profiteering, and therefore is taxed!   

By this logic, buying notes at a premium should be considered a capital loss, and therefore tax deductible, but to my knowledge, it isn't! 

Ridiculous!!   I'm not sure I still want to play LC if this is the case.....  the yield is much much lower than anticipated anyway so its not really worth the time.

princeb

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Re: Tax consequences in FolioFN
« Reply #1 on: March 21, 2016, 04:14:13 PM »
What's even more screwed up is for those who buy notes heavily discounted, eg. IGP or late notes at 50-75% off or whatever.   So LC treats that as a 1099 OID interest gain compared to full face value, so in essence, buyers will have to pay taxes on the 50-75% discount (which is supposed to account for the added risk). 

So an example, I buy a discounted note, cost basis is $1 for a note that is late, face value $20.

Transaction is seen (tax wise) as an immediate +$19 interest payment.

If same note is defaulted, cost basis is $1, so this amount is written off as a loss and factored in under 1099B, gross proceeds/cost basis.

So you get taxed for a net $18 interest gain that never actually materializes.  That is why my 1099 statement appears to show that I profited a lot more in LC than my actual adjusted account value actually shows.   

I'm not sure if I'm interpreting this correctly so will appreciate someone reviewing this.   If I'm correct, there is little to no incentive to buy discounted notes.  PAR or above makes better sense from a tax perspective.   Spoke to LC about this, rep was nice but had no clue.   Need to speak to tax specialists at LC to learn more.     

LC basically admits cost basis is f**cked if FolioFN notes bought at premium/discount are charged off, you have to manually calculate the true cost basis.  WTF?!?    >:(
http://kb.lendingclub.com/investor/articles/Investor/A-Note-on-Cost-Basis/?q=tax&l=en_US&fs=Search&pn=1

"For example, if a Note was purchased on the Folio Investing* Note Trading Platform at a discount or premium relative to outstanding principal plus accrued interest at the time of purchase and the same Note charged-off in 2015, the cost basis reported on the Form 1099-B (Recoveries and Proceeds from Charged-off Loans) may differ materially from what should be reported on your tax return. This example is only applicable to Form 1099-B (Recoveries and Proceeds from Charged-off Loans) and not Form 1099-B (Folio Investing Transactions).

In such circumstances, some investors have used information from the “Download Details – All Traded Notes” file (link available on the "My Notes" page at the bottom right hand corner) to calculate the premium (or discount) for each such Note using the following formula:
 
Transaction Price (cash paid to purchase on the Folio Investing* Note Trading Platform) less
Outstanding principal at time of transaction less
Accrued interest at time of transaction."

Who the heck has time to do that??
« Last Edit: March 21, 2016, 04:19:37 PM by princeb »

dompazz

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Re: Tax consequences in FolioFN
« Reply #2 on: March 21, 2016, 05:07:15 PM »
I thought the premium/discount was amortized over the remaining life of the loan as less/extra interest.  I didn't think it is an immediate gain/loss.

I've never bought through Folio, so maybe I am confusing how GAAP accounting works vs individual IRS rules.

princeb

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Re: Tax consequences in FolioFN
« Reply #3 on: March 21, 2016, 05:45:08 PM »
I thought the premium/discount was amortized over the remaining life of the loan as less/extra interest.  I didn't think it is an immediate gain/loss.

I've never bought through Folio, so maybe I am confusing how GAAP accounting works vs individual IRS rules.

Is it amortized?   This is crucial.   

If true, then buying a presumably higher quality note at a premium is better than a lower quality note at a discount, tax wise I would think. 

Fred93

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Re: Tax consequences in FolioFN
« Reply #4 on: March 21, 2016, 05:50:53 PM »
I thought the premium/discount was amortized over the remaining life...

Is it amortized?   This is crucial.   

Tax law requires that discounted bond/note purchases be amortized.

princeb

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Re: Tax consequences in FolioFN
« Reply #5 on: March 21, 2016, 06:10:46 PM »
I thought the premium/discount was amortized over the remaining life...

Is it amortized?   This is crucial.   

Tax law requires that discounted bond/note purchases be amortized.

So again, if it is amortized, then that defeats the "advantage" of buying discounted notes as the quality is likely lower.  Buying notes at a premium is actually more advantageous as the note quality is presumably better.   Therefore, is the correct conclusion, YTM matters whereas discount/premium does not, since it is amortized?? 

Also, is LC calculating the cost basis correctly with FolioFN notes that are charged off?   Apparently per their disclosures, the investors have to calculate it separately to be accurate.     
« Last Edit: March 21, 2016, 06:18:37 PM by princeb »

Ran

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Tax consequences in FolioFN
« Reply #6 on: March 21, 2016, 06:22:28 PM »

I thought the premium/discount was amortized over the remaining life...

Is it amortized?   This is crucial.   

Tax law requires that discounted bond/note purchases be amortized.

So again, if it is amortized, then that defeats the "advantage" of buying discounted notes as the quality is likely lower.  Buying notes at a premium is actually more advantageous as the note quality is presumably better.   Therefore, is the correct conclusion, YTM matters whereas discount/premium does not, since it is amortized?? 

Also, is LC calculating the cost basis correctly with FolioFN notes that are charged off?   Apparently per their disclosures, the investors have to calculate it separately to be accurate.     
The interest is correctly calculated in the sense that it's the REAL interest payment regardless of the premium/discount amortization. But cost basis is not correct for Folio-bought loans that charged off

princeb

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Re: Tax consequences in FolioFN
« Reply #7 on: March 21, 2016, 06:31:48 PM »
If amortized separately, how is net calculated at the end?    The premium/discount is offset by interest payment or charge off correct?   It seems that LC considers discounted notes as a 1099OID interest payment, whereas interest payments or charge offs are filed under 1099B.  Sorry, I'm being dense and might be missing something here. 

So are all you guys calculating the cost basis for all of your charged off FolioFN notes??   That's quite a bit of work, no?
« Last Edit: March 21, 2016, 06:37:44 PM by princeb »

BruiserB

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Tax consequences in FolioFN
« Reply #8 on: March 23, 2016, 09:05:53 PM »
The tax implications of using Folio has always scared me off. I guess I wouldn't be afraid to sell a note because it has a current value and you can sell it for a clear gain or loss. But buying notes at other than par value seems too complicated to deal with properly. I've always wondered how those who trade on Folio handle their taxes. I guess if I were to ever get into it, I would do it on with my IRA.


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princeb

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Re: Tax consequences in FolioFN
« Reply #9 on: March 29, 2016, 12:58:47 PM »
PUBLIC SERVICE ANNOUNCEMENT:

If you purchased on FolioFN and have charged off notes, please recheck your cost basis calculation.  I've cross checked using the LC excel download, and LC screwed the pooch on this.  For example on one note worth ~$18, cost basis was off by $3.

Its seriously ridiculous.     >:( >:(