Author Topic: Tax Implications of heavy buying and selling on Folio...will this cause a..  (Read 9690 times)

TheReaper

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Will this cause a nightmare to do tax returns for year 2016?  I started the 2016 year out buying quite a bit on Folio, but have sense reversed course and have been mostly selling, and buying a few shorter duration notes.  Was clipping at a rate of about 500 purchases a month to start the year, now down to about 50 a month, and last few months, been selling about 400/month.  I'm estimating about 2500 notes bought and 2500 notes sold for 2016.

Does anyone have past experience in handling a tax return with a similar buy/sell situation....Will this cause my local H&R Block preparer to have their head spin on a swivel as if possessed by an accounting nightmare demon?  My gut tells me it might, but fingers crossed, it won't.  This would be for a taxable account.

In advance, thank you for your help/advice.
« Last Edit: August 21, 2016, 12:06:23 PM by TheReaper »

BruiserB

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Tax Implications of heavy buying and selling on Folio...will this cause a..
« Reply #1 on: August 21, 2016, 01:24:05 PM »
I've wondered the same.  If I were to do Folio trading, I think I would only do it with my IRA account since I wouldn't have to figure out any tax implications.

Does LC's year end report provide enough info?  If you only sold notes, it seems pretty straight forward...you would just report proceeds vs a basis of whatever principal remains and have a capital gain/loss. But if you buy notes at a premium/discount, I think it may get complicated as I believe that results in the premium/discount having to be manually realized over the remaining payments of the loan. It becomes complicated for a single loan and I can't imagine calculating it properly for hundreds of loans. I get the feeling that LC just reports the interest that the par value loan receives and that the taxpayer is responsible for manually adjusting the basis, etc.  Can anyone else confirm?  How do most people deal with this?  I can only imagine 2 ways...

1) Just flat out only report the numbers that LC sends without making adjustments.  Seems to me this would result in you overpaying taxes on any note you bought at a premium.  You'd also be avoiding taxes on any notes you purchase at a discount.

2) Meticulously figure out the manual adjustments for any note not bought at par value. This seems wildly complicated unless LC somehow accounts for the adjustments in their year end reporting or if there is some simple third party software that can figure out the adjustments for you.


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« Last Edit: August 21, 2016, 01:34:15 PM by BruiserB »

jz451

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The way I am doing it now, even with such a small account ($1.5k) I made a spreadsheet where I calculate the gain/loss at the time of purchase of notes, straightline amortization that over the period of time I have held the notes, and calculate the gain/loss at the sale of any notes, and then sum up the total of all notes of amortization once the notes are sold or paid off. Obviously it is easier for me since I only have a few notes that I buy/sell each month.

BruiserB

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Tax Implications of heavy buying and selling on Folio...will this cause a..
« Reply #3 on: August 21, 2016, 03:42:26 PM »
That makes sense and seems somewhat manageable on a very small scale.  But then what will you do on your taxes....alter the numbers that LC sends you and make a note as to why?

Seems this would become exponentially more unmanageable as account size grows and if you used automatic buy/sell in Folio.  Especially when notes purchased at other than par value later default or are then sold again on Folio.  Unless someone has created a tool that can import all transactions and somehow automate all of the calculations and adjustments necessary.


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jz451

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Since I haven't had my account open long enough to receive a statement with tax info I'm not even sure what it details, but I'm keeping track either way until I get to that point next year. And yes if LC provides a significantly difference I'll provide my own info with documentation.

In my view it's easy to gather the information off of the traded notes excel spreadsheet on the notes tab on LC. All the info is there any easy to arrange, sorting by transaction date and copy/paste the data where you left off. I'm using a table for my spreadsheet so the calculations automatically update for new entries.

That makes sense and seems somewhat manageable on a very small scale.  But then what will you do on your taxes....alter the numbers that LC sends you and make a note as to why?

Seems this would become exponentially more unmanageable as account size grows and if you used automatic buy/sell in Folio.  Especially when notes purchased at other than par value later default or are then sold again on Folio.  Unless someone has created a tool that can import all transactions and somehow automate all of the calculations and adjustments necessary.


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TheReaper

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I've wondered the same.  If I were to do Folio trading, I think I would only do it with my IRA account since I wouldn't have to figure out any tax implications.

Does LC's year end report provide enough info?  If you only sold notes, it seems pretty straight forward...you would just report proceeds vs a basis of whatever principal remains and have a capital gain/loss. But if you buy notes at a premium/discount, I think it may get complicated as I believe that results in the premium/discount having to be manually realized over the remaining payments of the loan. It becomes complicated for a single loan and I can't imagine calculating it properly for hundreds of loans. I get the feeling that LC just reports the interest that the par value loan receives and that the taxpayer is responsible for manually adjusting the basis, etc.  Can anyone else confirm?  How do most people deal with this?  I can only imagine 2 ways...

1) Just flat out only report the numbers that LC sends without making adjustments.  Seems to me this would result in you overpaying taxes on any note you bought at a premium.  You'd also be avoiding taxes on any notes you purchase at a discount.


2) Meticulously figure out the manual adjustments for any note not bought at par value. This seems wildly complicated unless LC somehow accounts for the adjustments in their year end reporting or if there is some simple third party software that can figure out the adjustments for you.


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Exactly what I was thinking....wildly complicated for notes purchased at above/below par...which a very large percentage of mine were.   Would be great if someone stepped into this discussion and shed some personal experience on this matter.  jz451, great idea...but like you eluded to, not feasible for someone who's done it on a larger scale.

justice42

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I'm also very interested to hear from someone who has filed a tax return after having purchased/sold on the folio platform. I took advantage of the huge discounts on folio, would be nice to know how much uncle sam wants. 

anabio

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Will this cause a nightmare to do tax returns for year 2016?

I wondered the same thing. I thought it would be a nightmare, especially when dealing with a large number of loans. I have my doubts on how good an H&R type tax person would be with this. Truthfully, I generally regard those H&R types to be only for those people with easy tax returns that don't want to be bothered or are too intimidated to file their own tax return. I was worried that  it would require a much higher priced CPA or something and a LOT more interaction between me and that CPA.

 I have always done my own taxes and that included 10 years worth of owning a rental property, and then selling that property (without a realtor). I was never intimidated before but the thought of Folio...well I confess...that intimidated the heck out of me. Talk about an audit just waiting to happen!

That was one of the reasons I decided to just let my portfolio naturally amortize away. Since most of my loans only have 8-10 months remaining it was an easier decision for me.

Whoever has to go through this...it would be nice of them to leave a message around April 15th of next year...
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

Fred

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I bought and sold 1000's of Folio notes in 2015. 

I received 1099-B (Folio Investing Transactions).  The IRS will match the amounts reported on this form to the amounts reported on your tax return.  Information on this form may be categorized as short term or long term capital gains or losses, depending on how long an investor held the relevant Notes. Generally, the short term transactions are reported in Part I and long term transactions are reported in Part II of Form 8949.

anabio

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I bought and sold 1000's of Folio notes in 2015. 

I received 1099-B (Folio Investing Transactions).  The IRS will match the amounts reported on this form to the amounts reported on your tax return.  Information on this form may be categorized as short term or long term capital gains or losses, depending on how long an investor held the relevant Notes. Generally, the short term transactions are reported in Part I and long term transactions are reported in Part II of Form 8949.

Were you able to aggregate all your loan information into a few lines on your tax form? If you purchase individual stocks you need to specify information for each company for capital gain purposes (although multiple purchases/sales of the same stock can be combined into long/short term).

Are individual loans not treated the same as individual stocks?

If that is the case then I would not worry about buying/selling on Folio as far as taxes are concerned.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

storm

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Were you able to aggregate all your loan information into a few lines on your tax form? If you purchase individual stocks you need to specify information for each company for capital gain purposes (although multiple purchases/sales of the same stock can be combined into long/short term).

Are individual loans not treated the same as individual stocks?

If that is the case then I would not worry about buying/selling on Folio as far as taxes are concerned.

If you search this forum for past threads about taxes, there is some debate whether you need to list the individual loans or just the total.  Tax laws haven't been updated since before marketplace lending became a thing, so we are just trying to adapt and apply the old IRS rules as best as possible.  I whipped up a script to import the individual loans into my tax software, so it isn't too big of a deal for me either way.  I would hate to file a paper return though.

rawraw

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I bought and sold 1000's of Folio notes in 2015. 

I received 1099-B (Folio Investing Transactions).  The IRS will match the amounts reported on this form to the amounts reported on your tax return.  Information on this form may be categorized as short term or long term capital gains or losses, depending on how long an investor held the relevant Notes. Generally, the short term transactions are reported in Part I and long term transactions are reported in Part II of Form 8949.

Were you able to aggregate all your loan information into a few lines on your tax form? If you purchase individual stocks you need to specify information for each company for capital gain purposes (although multiple purchases/sales of the same stock can be combined into long/short term).

Are individual loans not treated the same as individual stocks?

If that is the case then I would not worry about buying/selling on Folio as far as taxes are concerned.
You can always just put one or two lines and then submit the actual Folio print off with a specific form in paper. TurboTax used to handle this. But I think this past year all my Folio transactions automatically synced into TurboTax.

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Fred93

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Are individual loans not treated the same as individual stocks?

No.  Bonds bought for a price other than par are indeed different.

The things you buy from LC are "notes", which are categorized as bonds by the IRS.  Read the rules for bonds at irs.gov  They are quite complex.  You must adjust the basis (ie what you paid for the bond) by adding in amortization.

History: Back in the 80's, after interest rates went way up, there were a lot of bonds selling for much less than par.  You could buy these bonds and just hold them, and then at maturity you would get a bunch of capital gain, which of course is favorably taxed.  The IRS decided this was a loophole.  To fix it they made rules that say if you buy a bond above or below par, you have to calculate an adjustment to the basis every year, and for bonds bought below par, have to treat some of the price rise as ordinary income each year.  This requires you to do a calculation for each bond.

Read IRS Pub 550 titled "investment income"
https://www.irs.gov/pub/irs-pdf/p550.pdf


Starting on page 15 is a section titled "Market Discount Bonds", by which they mean bonds that you have bought in a secondary market (ie folio) for less than par (which is what most of you are buying on folio).

You are required to accrue the market discount, and take a piece of it every year as INTEREST INCOME, and correspondingly increase your basis, so that when you sell, you pay less capital gain than you would have. 

Bonds bought above par have a different set of rules.

At the very least, you will need a big spreadsheet, containing all the bonds you hold during the tax year, calculating the accrual on each and summing them up.

« Last Edit: August 23, 2016, 01:39:44 PM by Fred93 »

anabio

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Are individual loans not treated the same as individual stocks?

No.  Bonds bought for a price other than par are indeed different.

The things you buy from LC are "notes", which are categorized as bonds by the IRS.  Read the rules for bonds at irs.gov  They are quite complex.  You must adjust the basis (ie what you paid for the bond) by adding in amortization.
----(etc)---
This requires you to do a calculation for each bond
----(etc)---

Only one word: WOW.

Makes me glad I didn't delve into this thing.

Thanks Fred93.
As Will Rogers stated: : I'm not as concerned about the return on my money as I am the return of my money

dr.everett

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Rawraw is right. Turbo tax supports it as of last year. Will be nice not to have to try to do what you think is right and let TT do it for you.