Lend Academy Network Forum

Lending Club Discussion => Investors - LC => Topic started by: Bohb Daishi on January 27, 2014, 01:35:25 AM

Title: Capital Gains on Folio Purchasing
Post by: Bohb Daishi on January 27, 2014, 01:35:25 AM
Say you purchase a 36-month note at a 10% discount and over the next 3 years, the borrower never misses a payment and it eventually gets paid off. Now, the taxable interest is easily to calculate. But how do you calculate the taxable gain on the 10% you earned from the discount? More importantly, how do you account for it since it is a discount on principal + interest, instead of just principal?

Is it all accounted for in the tax year that the note gets paid off? Is it amortized evenly throughout the three years? Or does it effectively increase your "interest income"?

Same question for purchasing at a premium. Does it reduce your interest income, and if so, in what year(s) does it apply?


If you have a sizable portfolio with a lot of folio purchases, I could see the tax man wanting a slice of that capital gain.


Title: Re: Capital Gains on Folio Purchasing
Post by: LC Adv on January 27, 2014, 12:52:59 PM
since all the so called "interest" is really Original Issue Discount (OID), I believe you have to report it over the time remaining on the note by adjusting the annual interest to include the higher OID caused by buying the note at a discount
Title: Re: Capital Gains on Folio Purchasing
Post by: PeerSocialLending on January 27, 2014, 04:29:44 PM
I am curious about this as well.  I thought I'd be OK by just buying notes for now and not selling, but after thinking about this - I think I'm wrong.  Better make enough purchases to make the tax headache worth it!
Title: Re: Capital Gains on Folio Purchasing
Post by: BruiserB on January 27, 2014, 04:32:47 PM
since all the so called "interest" is really Original Issue Discount (OID), I believe you have to report it over the time remaining on the note by adjusting the annual interest to include the higher OID caused by buying the note at a discount

....which would seem to be an absolute record keeping nightmare for someone who wanted to trade frequently in Folio.  I just can't make sense of how you would track this for tax purposes....unless somehow LC can keep track of it and give you the right info on the right forms at the end of the year.  Their tax records have gotten progressively better over the years, but I haven't had the nerve to take the plunge into playing around with Folio notes because I can't figure out how they should be accounted for.  If you could somehow download all of your data for the year and then run it through a macro that did all of the calculations, that might make it more palatable, but I don't know of anyone that has worked out this sort of tool.
Title: Re: Capital Gains on Folio Purchasing
Post by: yojoakak on January 27, 2014, 05:29:10 PM
Can't you just use whatever LendingClub sends you?
Title: Re: Capital Gains on Folio Purchasing
Post by: Brian on January 27, 2014, 05:40:40 PM
Can't you just use whatever LendingClub sends you?
One would hope it were that easy... however from tax threads in previous years it doesn't seem to always be the case.
Title: Re: Capital Gains on Folio Purchasing
Post by: Bohb Daishi on January 28, 2014, 01:58:02 AM
Can't you just use whatever LendingClub sends you?
One would hope it were that easy... however from tax threads in previous years it doesn't seem to always be the case.

In theory, I guess you could take whatever forms LendingClub sends you and use that as backup for your taxes. You could just play dumb if the tax man is smart enough to know you earned an extra dollar on every discounted note you purchased.

I would reasonably expect that you could also just add in the discount as taxable profit in the year the note gets paid off. The number would be small enough to not anger the IRS much. You would also have a good explanation for why you calculated it that way, given the high charge-off rates.
Title: Re: Capital Gains on Folio Purchasing
Post by: New Jersey Guy on January 28, 2014, 08:40:23 AM
I don't think it's possible to keep track of this on either platform.

If you buy a note off of Folio, all Lending Club does is account for the fact that you own it.  So they don't report it.

If you buy a note off of Folio, Folio doesn't report anything unless you sell the note.  So if you don't sell it, then it's all Lending Club and nothing to do with Folio.  So it doesn't get reported by anybody.

Title: Re: Capital Gains on Folio Purchasing
Post by: yojoakak on January 28, 2014, 12:06:45 PM
So if you don't sell it, then it's all Lending Club and nothing to do with Folio.  So it doesn't get reported by anybody.

Right. If you never sell it then there IS NO capital gain. (Right?)
Title: Re: Capital Gains on Folio Purchasing
Post by: New Jersey Guy on January 28, 2014, 12:42:30 PM
Quote
Right. If you never sell it then there IS NO capital gain. (Right?)

Right?  Maybe.  If it's over a year old, then it could be considered a Long Term Capital Gain, which would be taxed as interest. 

I'll tell you what it is.  It's nickles and dimes falling through the cracks.  As long as Lending Club stays disjointed from Folio, there is no way to accurately track this.

Truthfully, I've known about this for a year, because I track the value of my account differently than most here.
(Money invested + Capital Gains + interest) - Fees = Actual Value
This gives me a "True" monetary value which is much less than what LC says my Account Value is (Because of all the late notes I stock)

However, if I manually pick apart and add up all the little numbers for every folder I have, the amount is slightly more than what my Excel spreadsheets are showing.  I'm positive this is the result of those nickles and dimes.

But I'm talking a very small amount, $10, maybe upwards of $13.  It's not enough for me to worry about any tax implications.  It's certainly not worth the hours and hours of work to pick through every single note I bought last year that got paid off, just to see if I made 4-cents because I bought it a discount.

Personally, I wouldn't worry too much about it.

Title: Re: Capital Gains on Folio Purchasing
Post by: thezfunk on January 28, 2014, 02:34:06 PM
Quote
Right. If you never sell it then there IS NO capital gain. (Right?)

Right?  Maybe.  If it's over a year old, then it could be considered a Long Term Capital Gain, which would be taxed as interest. 

I'll tell you what it is.  It's nickles and dimes falling through the cracks.  As long as Lending Club stays disjointed from Folio, there is no way to accurately track this.

Truthfully, I've known about this for a year, because I track the value of my account differently than most here.
(Money invested + Capital Gains + interest) - Fees = Actual Value
This gives me a "True" monetary value which is much less than what LC says my Account Value is (Because of all the late notes I stock)

However, if I manually pick apart and add up all the little numbers for every folder I have, the amount is slightly more than what my Excel spreadsheets are showing.  I'm positive this is the result of those nickles and dimes.

But I'm talking a very small amount, $10, maybe upwards of $13.  It's not enough for me to worry about any tax implications.  It's certainly not worth the hours and hours of work to pick through every single note I bought last year that got paid off, just to see if I made 4-cents because I bought it a discount.

Personally, I wouldn't worry too much about it.

Think about the IRS ROI too.  Now, theoretically, all the billion dollar tax cheats get nailed before they would even thoughtfully considering coming after most of us (unless some of us are billion dollar tax cheats or we did something blatantly wrong).  Unfortunately, money = power in this world and power gets you out of trouble that 'normal' people have to deal with.  It doesn't help the IRS to have government shut downs and an ever smaller budget either.  And...just that quick I climbed up on a soap box without intending to.  I think I'll stop here before derailing things anymore.  Just the whole inefficiency of going after small tax violations when there are definitely much bigger fish to fry, really bugs me.
Title: Re: Capital Gains on Folio Purchasing
Post by: Bohb Daishi on January 29, 2014, 02:56:44 AM
Just the whole inefficiency of going after small tax violations when there are definitely much bigger fish to fry, really bugs me.

The IRS is surprisingly efficient in that respect. They *typically* only go after people when it is worth it for them. So a small $100 discrepancy won't raise any flags. But a $1,000 might, and a $10,000 definitely will.
Title: Re: Capital Gains on Folio Purchasing
Post by: New Jersey Guy on January 29, 2014, 10:33:56 AM
Quote
So a small $100 discrepancy won't raise any flags. But a $1,000 might, and a $10,000 definitely will.

Yea, but that's only if it's being reported, and it's not being reported.

If you're making an additional $1,000 in gains by purchasing "Late Notes going to Paid-off", let me know how you're doing it!  At a $1.15 profit a note, it would take you 870 discounted notes going to paid-off to make $1K.
Title: Re: Capital Gains on Folio Purchasing
Post by: dontvote on January 29, 2014, 07:42:54 PM
Quote
Right. If you never sell it then there IS NO capital gain. (Right?)

Right?  Maybe.  If it's over a year old, then it could be considered a Long Term Capital Gain, which would be taxed as interest. 

I'll tell you what it is.  It's nickles and dimes falling through the cracks.  As long as Lending Club stays disjointed from Folio, there is no way to accurately track this.

Truthfully, I've known about this for a year, because I track the value of my account differently than most here.
(Money invested + Capital Gains + interest) - Fees = Actual Value
This gives me a "True" monetary value which is much less than what LC says my Account Value is (Because of all the late notes I stock)

However, if I manually pick apart and add up all the little numbers for every folder I have, the amount is slightly more than what my Excel spreadsheets are showing.  I'm positive this is the result of those nickles and dimes.

But I'm talking a very small amount, $10, maybe upwards of $13.  It's not enough for me to worry about any tax implications.  It's certainly not worth the hours and hours of work to pick through every single note I bought last year that got paid off, just to see if I made 4-cents because I bought it a discount.

Personally, I wouldn't worry too much about it.

Think about the IRS ROI too.  Now, theoretically, all the billion dollar tax cheats get nailed before they would even thoughtfully considering coming after most of us (unless some of us are billion dollar tax cheats or we did something blatantly wrong).  Unfortunately, money = power in this world and power gets you out of trouble that 'normal' people have to deal with.  It doesn't help the IRS to have government shut downs and an ever smaller budget either.  And...just that quick I climbed up on a soap box without intending to.  I think I'll stop here before derailing things anymore.  Just the whole inefficiency of going after small tax violations when there are definitely much bigger fish to fry, really bugs me.

this is completely wrong. the billion dollar guy has defenses, the 10K guy does not. you have to combine the payout to the IRS with the difficulty of getting at the money to understand what the 'expected value' of the takedown is. THEN the IRS will take down the highest return for the ease guy. If it costs them 1mm to get 1.5mm they'll go after that guy before the 10K guy, but if it's essentially free to take down 100,000 10k guys guys guess where they'll be sniffing around? yeah your house buddy and I've already called them.
Title: Re: Capital Gains on Folio Purchasing
Post by: lcdude on January 29, 2014, 11:53:02 PM
There is no capital gain in that scenario if the note is held to maturity. You pay tax on the interest only.

Say you purchase a 36-month note at a 10% discount and over the next 3 years, the borrower never misses a payment and it eventually gets paid off. Now, the taxable interest is easily to calculate. But how do you calculate the taxable gain on the 10% you earned from the discount? More importantly, how do you account for it since it is a discount on principal + interest, instead of just principal?

Is it all accounted for in the tax year that the note gets paid off? Is it amortized evenly throughout the three years? Or does it effectively increase your "interest income"?

Same question for purchasing at a premium. Does it reduce your interest income, and if so, in what year(s) does it apply?


If you have a sizable portfolio with a lot of folio purchases, I could see the tax man wanting a slice of that capital gain.
Title: Re: Capital Gains on Folio Purchasing
Post by: Bohb Daishi on January 30, 2014, 03:12:12 AM
There is no capital gain in that scenario if the note is held to maturity. You pay tax on the interest only.

Yes there is. For example, if you purchase a 10% note at a discount that gives it an "effective" interest rate of 25%, you will only pay taxes on the 10% stated interest because the rest doesn't get calculated nor reported by LendingClub.
Title: Re: Capital Gains on Folio Purchasing
Post by: bobeubanks on January 30, 2014, 12:13:45 PM
I would think taxation on a folio purchase would be the same as if you bought a gov't or corp bond on the open market. I don't know how that works, but taxation on traded bonds should be well established.
Title: Re: Capital Gains on Folio Purchasing
Post by: yojoakak on January 30, 2014, 05:25:19 PM
I guess bonds can have capital gains, even if you never sell them:

"When buying muni bonds on the secondary market, investors must be aware that bonds purchased at a discount (less than par value), will be taxed upon redemption at the capital gains rate. Note that this tax does not apply to the coupon payments, but only the principal of the bond." http://www.investopedia.com/articles/06/munibond.asp


But of course our LendingClub notes aren't really bonds. Truth be told, I'm not even sure what they "really" are. (see e.g. http://www.lendacademy.com/forum/index.php?topic=646.0 )

And even if they are like bonds, the redemption value at maturity is $ZERO. So how can you calculate a capital gain on that?


Is anyone in here an accountant? Is AmCap still active on this board?

Title: Re: Capital Gains on Folio Purchasing
Post by: core on January 30, 2014, 05:44:43 PM
If you buy a bond at a big enough discount it's taxable right away in some cases.  Or so cow-noise Cramer says.  I don't know what the threshold is, nor under what circumstances it applies. 
Title: Re: Capital Gains on Folio Purchasing
Post by: Fred on January 30, 2014, 11:37:49 PM
This is from FINRA:  https://www.finra.org/Investors/InvestmentChoices/Bonds/SmartBondInvesting/BuyingSelling/P133255

"When you purchase an individual bond at face value and hold it to maturity, there is no capital gain to be taxed."

I am not a tax expert; however, this may mean that if you purchase a bond at a discount (and hold it to maturity), your capital gain would be the difference between par value and purchase price.

And, if the maturity is 1+ year after purchase date, the tax will be at the long-term rate.
Title: Re: Capital Gains on Folio Purchasing
Post by: Bohb Daishi on January 31, 2014, 12:58:14 AM
"When buying muni bonds on the secondary market, investors must be aware that bonds purchased at a discount (less than par value), will be taxed upon redemption at the capital gains rate. Note that this tax does not apply to the coupon payments, but only the principal of the bond." http://www.investopedia.com/articles/06/munibond.asp

But of course our LendingClub notes aren't really bonds. Truth be told, I'm not even sure what they "really" are. (see e.g. http://www.lendacademy.com/forum/index.php?topic=646.0 )

And even if they are like bonds, the redemption value at maturity is $ZERO. So how can you calculate a capital gain on that?

Is anyone in here an accountant? Is AmCap still active on this board?

I used to do corporate accounting. Basically, whenever the tax law is vague in a circumstance, you can typically use whatever method makes the most sense. In the case of LendingClub notes, you could argue to the IRS that the notes are substantially similar to bonds, so the taxation should be the same. The worst-case scenario is that the IRS disagrees and makes you pay up a few extra dollars.
Title: Re: Capital Gains on Folio Purchasing
Post by: Keltset on February 05, 2014, 02:03:10 AM
Bhob,

I am also an accountant, note: taxation is not where my skill set is... Also anything I state is purely my opinion and not tax advice.

I think people over complicate the entire tax situation and implications of both LC and Folio... Look at who we are lending to and not what the direct cause of loss or profit is tied to contractually within the aggregate. We are -not- really investing through a broker in individual stocks. Who owns the notes that are tied to the performance of any unit of money that is "invested" through lending club.

As taxation is not my specialty I would be interested in hearing your thoughts, because you do generally go with the "closest" regulations you can apply and I think it's a pretty simple connection as to what to do with taxes here. The reality is we won't know who is right or wrong until it is really put to the test but until then, I KISS....
Title: Re: Capital Gains on Folio Purchasing
Post by: Bohb Daishi on February 05, 2014, 02:39:36 AM
The reality is we won't know who is right or wrong until it is really put to the test but until then, I KISS....

Honestly, you could probably just use whatever info LC gives you on the 1099-OID. If the IRS comes knocking, just play stupid and say it's LendingClub's fault for providing inaccurate tax forms. That should at least get you out of paying any penalties... at least I think it would.