Author Topic: Secondary Market for Transferring Notes  (Read 8050 times)

Simon

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Secondary Market for Transferring Notes
« on: March 23, 2013, 11:46:21 PM »
I originally started Lending Club with a normal taxable account. However, I've become more and more enamored with my secondary account opened seven months later: a Roth IRA. I am annoyed by filing taxes for this first account, but own some really great notes with wonderful interest rates and good payment history, so I'm hesitant about selling these notes off and closing my account down.

I wanted to propose a very real scenario for ya'll and hear your thoughts: what if I used the secondary market to sell my notes to myself, moving them from my taxable account to my Roth IRA? What about using FOLIOfn as a transfer tool? Is this allowed?

While there would be a small hit from the fee associated with the sale, doing this would allow me to enjoy the remaining payments of my loans tax free.

Reading the following thread, I see I only need to keep the note at market value, which I assume means selling them at-cost in order to avoid fraud: http://www.lendacademy.com/forum/index.php?topic=506

Thoughts?
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Zach

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Re: Secondary Market for Transferring Notes
« Reply #1 on: March 24, 2013, 10:41:43 AM »
I originally started Lending Club with a normal taxable account. However, I've become more and more enamored with my secondary account opened seven months later: a Roth IRA. I am annoyed by filing taxes for this first account, but own some really great notes with wonderful interest rates and good payment history, so I'm hesitant about selling these notes off and closing my account down.

I wanted to propose a very real scenario for ya'll and hear your thoughts: what if I used the secondary market to sell my notes to myself, moving them from my taxable account to my Roth IRA? What about using FOLIOfn as a transfer tool? Is this allowed?

While there would be a small hit from the fee associated with the sale, doing this would allow me to enjoy the remaining payments of my loans tax free.

Reading the following thread, I see I only need to keep the note at market value, which I assume means selling them at-cost in order to avoid fraud: http://www.lendacademy.com/forum/index.php?topic=506

Thoughts?

I believe this is acceptable, but you have to make sure that the trade is a near even exchange of cash for notes. It is against IRS policy to sell yourself the securities at super-inflated prices to account for loses and create the gains in a non-taxable account. So, if you want to sell a $25 note to yourself, you should sell it at par to your IRA account. What you CANNOT do, is sell a $25 note to your IRA account for $0.01, and right off a loss of $24.99 on the taxable account.

I think AmCap could probably confirm this, or provide the other essential taxation commentary.

Show Me The $

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Re: Secondary Market for Transferring Notes
« Reply #2 on: March 24, 2013, 11:25:57 AM »
i just did this for a friends notes....I paid the fees, which is BS, but whatever.

Zach

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Re: Secondary Market for Transferring Notes
« Reply #3 on: March 24, 2013, 12:08:46 PM »
i just did this for a friends notes....I paid the fees, which is BS, but whatever.

Did what....?

rocco.g

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Re: Secondary Market for Transferring Notes
« Reply #4 on: March 24, 2013, 02:39:47 PM »
Like most other people who provide their opinion, I am not a tax expert and this is just my thoughts on the topic:

I would be very hesitant to sell notes on Folio and buy them in your IRA account.  IRA's have a list of prohibited transactions one of which is "selling property to it" (http://www.irs.gov/publications/p590/ch01.html#en_US_2012_publink1000230855).  (And my current understanding is that securities are considered property and your notes are considered securities, hence the whole register with the SEC thing).

A lot of people seem to be making references to the wash sale rules saying it is ok to sell stuff at a fair market price and then buy it in your IRA.  The IRS clarifies the wash sale rules some in this publication: http://www.irs.gov/pub/irs-drop/rr-08-05.pdf but an important item of note in this is that this publication states that is only relevant when one "executes the Sale and the Purchase with different, unrelated market participants.".  This publication isn't saying it is ok to sell stuff to yourself, it is just clarifying how the wash sale rule works in relationship to your IRA and the tax consequences.   (I can't find a link off hand, but my understanding is selling and buying the same stock on the open market is kind of a loop hole to the "sell property to your yourself" problem because you aren't selling/buying directly to yourself, you are on an open market with unknown and hence unrelated participants on both ends of your two seperate transaction. This is not the case if you are knowingly on both ends of a single transaction.

A takeaway from the previous case that people seem to be missing is bullet point number 16 (http://www.sec.gov/litigation/admin/34-48432.htm - scroll down to 16).  The IRS told these people their IRAs were invalid.  Bullet 18 talks about excess contributions later on and how this was violated, but it doesn't say this is what invalidated the IRA.  And the IRA rules for excess contributions (first irs link above) only talk about tax penalties for excess contributions.  The penalties don't mention anything about losing your IRA status.  The prohibited transaction section does mention losing your IRA status, and I would assume these people got hit for knowingly being on both ends of a transaction and hence performed a prohibited transaction on top of their other violations for not properly handling wash sales and excess contribution.

Just my thoughts, but I researched this same question a while back and decided I didn't want to risk it.

Show Me The $

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Re: Secondary Market for Transferring Notes
« Reply #5 on: March 24, 2013, 03:06:35 PM »
i just did this for a friends notes....I paid the fees, which is BS, but whatever.

Did what....?

Transferred notes using foliofn from their account to mine.

Zach

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Re: Secondary Market for Transferring Notes
« Reply #6 on: March 24, 2013, 03:10:55 PM »
i just did this for a friends notes....I paid the fees, which is BS, but whatever.

Did what....?

Transferred notes using foliofn from their account to mine.

Into or from an IRA, or just a taxable account?

AmCap

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Re: Secondary Market for Transferring Notes
« Reply #7 on: March 24, 2013, 03:21:08 PM »
I'm not terribly familiar w/ the IRA rules, but I think selling personal investment property to your IRA is prohibited transaction.  I'd just sell the notes for cash and move the cash over to your IRA if you really want.  Keep it simple.  My two cents...

Zach

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Re: Secondary Market for Transferring Notes
« Reply #8 on: March 24, 2013, 03:38:17 PM »
I would assume that as Show Me The $ described above would also be prohibited? Selling securities dirt cheap to a friend/family member (account that you don't personally own) with intent to use as a tax writeoff, and reaping the benefits of their IRA?

SBryantMS

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Re: Secondary Market for Transferring Notes
« Reply #9 on: March 24, 2013, 04:19:32 PM »
I think that there is one important piece of information missing here -- these notes are NOT being directly sold from the taxable account to the IRA account.   

This trade seems to me to be the same as account A selling a bond on the open market and account B buying the bond on the open market.  There may be many or few of the same bonds offered for sale.  The fact that the sale takes place in a "Open Market" negates the direct account sale argument. 

A loan is composed of many notes, I believe that the argument could be made that the note was offered by Account A at fair market value and that account B purchased that note in the open market.  It is even possible that someone else could purchase the note before account B was able to purchase it.

I think that this is NOT a transfer but in fact a valid sale and purchase.  With that said, would I push the envelope and do it: NO! 

The IRS can be a formidable beast when mad.   

lender_john

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Re: Secondary Market for Transferring Notes
« Reply #10 on: March 24, 2013, 06:31:52 PM »

If it doesn't go against the letter of the law, it seems to at least go against the spirit or intention of the law...

I wonder if the scenario was slightly different, what if there were two people involved?

Hypothetically speaking, as long as it goes on the open market there shouldn't be any issues, right?

rocco.g

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Re: Secondary Market for Transferring Notes
« Reply #11 on: March 24, 2013, 07:44:08 PM »
I couldn't find the IRS document I read before about the open market and its relation to this or I would have linked to it (I looked into this a few months ago and was trying to google up the documents I read before), but I don't remember it saying that the open market was some sort of blanket exemption.  I think it had something to do with other parties being involved and the fair market price being set by these other parties, not yourself.

I don't know how Folio works for Lending Club, since I don't use Lending Club, but on Prosper you can clearly see the person who is selling the note in the listing, so it would be impossible to claim you didn't know you were buying it from yourself and that a third party was potentially involved in the transaction.  Now you could probably run a search for "similar" notes to yours (i.e. ones that belong to the same loan as the note you own but are being sold by somebody else) and buy those, and then sell your own as two separate transactions.  This would then let the fair market actually indicate what you buy/sell for (because of other party involvement completing the buy and sell) and then you would need to make sure you follow wash sale rules and don't deduct any loss if you have one on the sale.  I would feel comfortable doing this type of transaction myself and feel that it meets the letter of the law and the spirit of the law.

Of course, I wouldn't actually do this transaction because the market for Folio is not consistent enough that I feel I could actually pull this type of transaction off without the spread being way off.  And that last statement just makes me even more comfortable that this is the right way to go.  Doing it this way I am I am at the mercy of the market because it relies on somebody else to agree on the price for both buying and selling and I can't influence control over the entire transaction.


Simon

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Re: Secondary Market for Transferring Notes
« Reply #12 on: March 25, 2013, 07:28:19 PM »
Look like a no-go then. Ah well, it was easily worth the ask.
Writes at the peer to peer lending site LendingMemo.

nonattender

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Re: Secondary Market for Transferring Notes
« Reply #13 on: March 30, 2013, 12:36:49 PM »
This was my favorite post in the last few weeks...  No one else wants to raise their hand and admit to self-dealing with their IRA account?!
A little nonsense now and then is relished by the wisest men.

Simon

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Re: Secondary Market for Transferring Notes
« Reply #14 on: April 01, 2013, 12:33:41 PM »
Perhaps you can go first  ;)

This was my favorite post in the last few weeks...  No one else wants to raise their hand and admit to self-dealing with their IRA account?!
Writes at the peer to peer lending site LendingMemo.