Lend Academy Network Forum

Lending Club Discussion => Investors - LC => Topic started by: Boatguy on March 06, 2014, 09:24:57 PM

Title: Taxes - a sanity check
Post by: Boatguy on March 06, 2014, 09:24:57 PM
Three years ago I concluded that the tax treatment of LC notes was so awful they weren't worth holding in a taxable account and shuffled my money so that my LC allocation was in an IRA.  2011 was not a great year for LC notes so I'd like to run the logic by this esteemed group and see if my logic checks out.

These numbers are round for the simplicity of discussion, but I think they are valid for discussion.  Let's assume a $10,000 portfolio of Grade C notes.  Rounding off the numbers, grade C has an average rate of 15% and a default rate of 5%.  Let's also assume that my tax rate on ordinary income is 30% and 15% on capital gains.  Here is how I see this playing out after tax.

Interest income = $1,500
Charge offs = $500
Net cash = $1,000
Pre-tax gain = 10%

OID Income = $1,500
Income tax = 30% x $1,500 = $450
Offsetting capital loss (assumes I have other cap gains) = 15% x $500 = $75

After tax cash = $1,000 - $450 + $75 = $625
After tax return = 6.25%

And if I was in a max bracket at 45% combined fed + state (California) and 20% on cap gains it would look more like this:

Income tax = 45% x $1,500 = $675
Offsetting capital loss = 20% x $500 = $100
After tax cash = $1,000 - $675 + 100 = $425
After tax return = 4.25%

This is for Grade C notes, for Grade D/E/F notes it is much worse since the taxable OID income goes up much faster than the charge off cap loss offset.

Does this example look pretty accurate to you guys?

 
Title: Re: Taxes - a sanity check
Post by: storm on March 07, 2014, 01:14:18 AM
I'm no tax expert or math whiz, but I'll take a crack at it...

Where are you getting the 30% tax rate?  If your tax rate is that high, you likely don't qualify for an IRA.  Your effective tax rate is highly dependent on any other income and will be less than the tax bracket you might fall in.  That is because your income is taxed in tiers by the IRS.  In 2013, for single filers, the first $8,925 earned is taxed at 10%.  Income from $8,926 to $36,250 is taxed at 15%.  $36,251 to $87,850 is taxed at 25%.  And so on.  Let's say my adjusted gross income is $75k for the year.  Subtract the single standard deduction of $6,100 for a taxable income of $68,900. Looking at the tax tables, my tax is $13,160 making my effective tax rate less than 18%.  I'm not even going to get started on state taxes as I am in a different state.

Charge-offs = capital loss and are used to offset capital gains.  If there are no capital gains, then they are essentially subtracted from your income to give you your AGI.  Capital losses are not taxed.

Let's say I received a W-2 for $74k.  I add my $1500 OID interest income.  I fill out the Schedule D, with my $500 charge-off/capital loss.  That brings my AGI to $75k.  $1000 net gain x 18% tax rate = $180.  So after taxes, I made $820.  Divide that into $10k, and my after-tax return is 8.2%.
Title: Taxes - a sanity check
Post by: Jmar42 on March 07, 2014, 01:25:41 AM
Welcome to new America.
Title: Re: Taxes - a sanity check
Post by: BruiserB on March 07, 2014, 02:19:38 AM
I'm no tax expert or math whiz, but I'll take a crack at it...

Where are you getting the 30% tax rate?  If your tax rate is that high, you likely don't qualify for an IRA.  Your effective tax rate is highly dependent on any other income and will be less than the tax bracket you might fall in.  That is because your income is taxed in tiers by the IRS.  In 2013, for single filers, the first $8,925 earned is taxed at 10%.  Income from $8,926 to $36,250 is taxed at 15%.  $36,251 to $87,850 is taxed at 25%.  And so on.  Let's say my adjusted gross income is $75k for the year.  Subtract the single standard deduction of $6,100 for a taxable income of $68,900. Looking at the tax tables, my tax is $13,160 making my effective tax rate less than 18%.  I'm not even going to get started on state taxes as I am in a different state.

Charge-offs = capital loss and are used to offset capital gains.  If there are no capital gains, then they are essentially subtracted from your income to give you your AGI.  Capital losses are not taxed.

Let's say I received a W-2 for $74k.  I add my $1500 OID interest income.  I fill out the Schedule D, with my $500 charge-off/capital loss.  That brings my AGI to $75k.  $1000 net gain x 18% tax rate = $180.  So after taxes, I made $820.  Divide that into $10k, and my after-tax return is 8.2%.

First, you can qualify for a traditional IRA at any income.  You may not be able to deduct your contribution, but you can still contribute and shield your interest earnings from taxation.  It's also possible to roll funds from a 401(k) to an IRA. Roth IRA contributions may be prohibited at a certain income level.

Next, your effective tax rate makes no difference....it's your marginal tax rate that determines how the additional 1000 is taxed.  In your example your taxable income puts you in the 25% marginal tax bracket so you will give 250 to Uncle Sam and your effective earnings are 7.5%

The original poster was also correct that if you have other capital gains, then your losses offset those rather than ordinary income.  So your 500 loss might be offsetting income that is taxed at 15 or 20% rather than 25 or 28% if you are in a higher tax bracket.  So your deduction is devalued since it doesn't offset the OID income which is taxed at your marginal rate.

The original poster was entirely correct in his math if his State and Federal marginal rates are 45% except I think he is maybe missing the state deduction for his losses.  In any case you pay full tax on your gross gains but may end up deducting your losses against lower taxed income....so yea, the after tax effect can be a lot less than you might expect.
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 07, 2014, 03:36:37 PM
Thank you for your confirmation on the basic numbers.

As you point out, essentially any retirement funds can be rolled into an IRA when you leave a company.  My IRA contains funds from a variety of different types of retirement plans during my career.

The top rate in California is 9.6% and is reached at $50K of taxable income.  Adjusting for the deduction on max Fed taxes ((1-.4)*9.6) the top marginal rate is thus closer to 46%.

Of more relevance is that the combined marginal tax rate for a California resident with taxable income of $50K is (.25 + ((1-.25)*9.6) =  32.2%.

The bottom line is that most investors here probably have a marginal rate over 25% and 30% is not a wild number.

My point was that taking charge offs as cap losses, which is not the way that LC calculates Adj Net Return, has a significant impact on after tax income.  Further, the impact worsens in the lower grade loans (D-E-F) as the percentage of loans charged off rises.

Additionally, there is a $3K / yr cap on deducting capital losses.  If for example an investor placed $50K in a portfolio that had 7% charge offs, the resulting $3,500 of capital losses would not be fully deductible without capital gains from some other investment.

Investing in LC is not like buying a bond.
Title: Re: Taxes - a sanity check
Post by: BruiserB on March 07, 2014, 06:39:12 PM
Exactly, Boatguy!  I just realized this myself this year as I was entering my tax info last month.  If you have no other capital gains and your account is small enough that you can avoid going over $3000 per year of charge offs, then your write-offs for losses will happen at your marginal tax rate.  Or if you have short term capital gains to offset and you have no long term gains then you are fine. 

But if you have long term gains that would be taxed at a low rate, your losses will wipe them out.

I started an IRA with LC last year and contributed already for this year, even though my income is too high to write off the contributions.  I think I can withdraw funds from my work 401(k) and roll them to an IRA and I may consider doing that at some point.  I'm waiting on that to see how the industry shakes out...if it becomes impossible for the little guy to invest it may not continue to be worth it.
Title: Re: Taxes - a sanity check
Post by: BruiserB on March 07, 2014, 07:54:06 PM
Your point on higher risk loans being more likely to have this adverse tax effect is something I didn't ever think of.  I had been focusing on higher risk loans, but I may adjust this strategy.  Many of the loans that p2p-picks.com selects in its "Profit Maximizer" model are C grade loans....I may increase my weight there.

So thanks for your insightful post!
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 07, 2014, 08:56:48 PM
So thanks for your insightful post!

You're welcome.

That said, I was kind of hoping someone would find a flaw in the thinking, so if anyone is lurking who doesn't see it this way I'd appreciate hearing from you.
Title: Re: Taxes - a sanity check
Post by: BruiserB on March 07, 2014, 10:20:26 PM
Yea, I wish it wasn't true either!  It's definitely better than having money languish in a CD but you are going to pay taxes immediately as your balance grows. I do like the idea of holding notes in an IRA.  My goal is to have my taxable account generate my IRA contribution each year, and then continue to grow my balance in a tax sheltered way.

I have been afraid to dabble in Folio trading as the rules for accounting for OID when notes are bought at a premium or discount seem to be a nightmare...way too much record keeping for a $25 note.  I don't understand how Folio users here manage to do their taxes.

I thought that it would make sense to do Folio trading in my IRA account, but according to posts on here, that is questionable as well as Folio is not approved as a custodian apparently.  I'm hoping that eventually clears up.
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 08, 2014, 03:40:47 PM
An IRA is definitely the best place for LC investing.  You can trade with Foliofn from an IRA, not a problem.

Trading from the IRA avoids the tax inefficiencies of the LC model and sidesteps the non-existent basis tracking by LC and Folio

My sense is that LC income/losses are being reported in a broad variety of "creative" methods and that P2P transactions are currently below the IRS radar.  One day they'll wake up clarify the treatment and allow LC to take all the weasel words and ambiguity on taxes out of their prospectus.
Title: Re: Taxes - a sanity check
Post by: BruiserB on March 08, 2014, 03:52:16 PM
An IRA is definitely the best place for LC investing.  You can trade with Foliofn from an IRA, not a problem.

Trading from the IRA avoids the tax inefficiencies of the LC model and sidesteps the non-existent basis tracking by LC and Folio

My sense is that LC income/losses are being reported in a broad variety of "creative" methods and that P2P transactions are currently below the IRS radar.  One day they'll wake up clarify the treatment and allow LC to take all the weasel words and ambiguity on taxes out of their prospectus.

Somebody just started this thread:

http://www.lendacademy.com/forum/index.php?topic=2134.0

Looks like there is speculation that losses should be treated as ordinary losses, but as you said there hasn't yet been a definitive ruling.

I wonder how Peter's hedge fund will handle this on the end of year 1099's they send to investors?  Will each person receive OID income and long and short term losses or will they just get a statement with a net amount of earnings?  If it's the latter, it could be an argument for investing through a fund rather than individually (even with the extra fees).

And I know you can technically CAN trade on Folio with an IRA (I have it approved for my account too, but haven't traded yet).  I hesitate to after reading this long thread.....apparently it is prohibited by LC's terms and conditions even though they will activate it on your account!

http://www.lendacademy.com/forum/index.php?topic=1674.0
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 09, 2014, 12:19:39 PM
The PPM for Peter's fund sets it up as a partnership so everything will flow through, there is no reconfiguration of income.

What I don't understand is why P2P notes would be treated differently than any other bond.  If a corporate bond defaults, it's a cap loss, not ordinary loss.  These are just junk bonds; high interest rate and high default rate.  Interest on bonds is taxed on a cash basis, discounts are OID income spread over the term of the bond and premiums are amortized over the life of the bond.  Why the accrual accounting at LC?
Title: Re: Taxes - a sanity check
Post by: rawraw on March 09, 2014, 09:03:51 PM
The PPM for Peter's fund sets it up as a partnership so everything will flow through, there is no reconfiguration of income.

What I don't understand is why P2P notes would be treated differently than any other bond.  If a corporate bond defaults, it's a cap loss, not ordinary loss.  These are just junk bonds; high interest rate and high default rate.  Interest on bonds is taxed on a cash basis, discounts are OID income spread over the term of the bond and premiums are amortized over the life of the bond.  Why the accrual accounting at LC?
Read the prospectus to see these aren't just regular bonds you are buying -- hence the OID
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 09, 2014, 10:57:43 PM
LC prospectus or Lend Academy PPM?
Title: Re: Taxes - a sanity check
Post by: Fred93 on March 10, 2014, 01:37:24 AM
What I don't understand is why P2P notes would be treated differently than any other bond.  ... Interest on bonds is taxed on a cash basis, discounts are OID income spread over the term of the bond and premiums are amortized over the life of the bond.  Why the accrual accounting at LC?

The LC notes make contingent payments.  (They only pay you if the borrower pays on his loan.)  The IRS says contingent bond payments are treated as OID.   

Don't blame me.  I didn't make the rule.
Title: Re: Taxes - a sanity check
Post by: mikedave on March 10, 2014, 11:37:55 AM
Do I treat losses from selling bad loans on Folio different that losses sustained for charge offs?
Title: Re: Taxes - a sanity check
Post by: jpildis on March 10, 2014, 02:12:20 PM
What I don't understand is why P2P notes would be treated differently than any other bond.  ... Interest on bonds is taxed on a cash basis, discounts are OID income spread over the term of the bond and premiums are amortized over the life of the bond.  Why the accrual accounting at LC?

The LC notes make contingent payments.  (They only pay you if the borrower pays on his loan.)  The IRS says contingent bond payments are treated as OID.   

Don't blame me.  I didn't make the rule.

If our investments are considered Contingent Payment Debt Instruments by the IRS, any capital losses are reported as Ordinary Losses and they are not subject to capital loss limits or the lower capital loss/gain rates.  LC explicitly raises this possibility in their prospectus (though the prospectus states that LC does not believe these are CPDI's).  This is the best possible outcome for larger investors who, like me, already have capital loss carryovers from other investing activities.

I plan to file this way and go back and revise by 2011 and 2012 taxes.  As always, this is not advice for you... talk to your tax people.
Title: Re: Taxes - a sanity check
Post by: Lovinglifestyle on March 10, 2014, 03:00:05 PM
What I don't understand is why P2P notes would be treated differently than any other bond.  ... Interest on bonds is taxed on a cash basis, discounts are OID income spread over the term of the bond and premiums are amortized over the life of the bond.  Why the accrual accounting at LC?

The LC notes make contingent payments.  (They only pay you if the borrower pays on his loan.)  The IRS says contingent bond payments are treated as OID.   

Don't blame me.  I didn't make the rule.

If our investments are considered Contingent Payment Debt Instruments by the IRS, any capital losses are reported as Ordinary Losses and they are not subject to capital loss limits or the lower capital loss/gain rates.  LC explicitly raises this possibility in their prospectus (though the prospectus states that LC does not believe these are CPDI's).  This is the best possible outcome for larger investors who, like me, already have capital loss carryovers from other investing activities.

I plan to file this way and go back and revise by 2011 and 2012 taxes.  As always, this is not advice for you... talk to your tax people.

Where would one report Ordinary Losses?  On a separate sheet to justify declaring less OID income?
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 10, 2014, 05:49:34 PM
I don't know exactly where it gets reported, but I'm sure there is a line or form somewhere.

The tricky part is that LC does not report defaults to the IRS at all (see the note on the 1099B).  The IRS has no way to verify the number we would insert as an ordinary loss (or as a cap loss for that matter) which seems like an invitation to an audit.

Very different than a brokerage 1099 which clearly shows the ST and LT cap gains/losses.
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 10, 2014, 05:51:37 PM
If our investments are considered Contingent Payment Debt Instruments by the IRS, any capital losses are reported as Ordinary Losses and they are not subject to capital loss limits or the lower capital loss/gain rates.  LC explicitly raises this possibility in their prospectus (though the prospectus states that LC does not believe these are CPDI's).  This is the best possible outcome for larger investors who, like me, already have capital loss carryovers from other investing activities.

I plan to file this way and go back and revise by 2011 and 2012 taxes.  As always, this is not advice for you... talk to your tax people.

I agree it is a much better outcome.  What changed your perspective from the way you prepared your 2011/2012 taxes?
Title: Re: Taxes - a sanity check
Post by: jpildis on March 10, 2014, 08:15:18 PM
If our investments are considered Contingent Payment Debt Instruments by the IRS, any capital losses are reported as Ordinary Losses and they are not subject to capital loss limits or the lower capital loss/gain rates.  LC explicitly raises this possibility in their prospectus (though the prospectus states that LC does not believe these are CPDI's).  This is the best possible outcome for larger investors who, like me, already have capital loss carryovers from other investing activities.

I plan to file this way and go back and revise by 2011 and 2012 taxes.  As always, this is not advice for you... talk to your tax people.

I agree it is a much better outcome.  What changed your perspective from the way you prepared your 2011/2012 taxes?

I have a high marginal tax rate and a ton of capital loss carry-overs.  I'm making a solid net pre-tax return (12+%) but post-tax, it's about 3-4% because I cannot take the losses against the income.  I think the IRS would understand as I'm simply trying to pay tax on my net return from LC and Prosper.
Title: Re: Taxes - a sanity check
Post by: BruiserB on March 10, 2014, 09:17:45 PM
I have a high marginal tax rate and a ton of capital loss carry-overs.  I'm making a solid net pre-tax return (12+%) but post-tax, it's about 3-4% because I cannot take the losses against the income.  I think the IRS would understand as I'm simply trying to pay tax on my net return from LC and Prosper.

You think the IRS would understand you bent the rules in your favor?  Good luck with that!

 ::)

Seriously though, I guess you can give it a shot, the worst that will happen is you'll get audited or they will rule against you.  You may not pay a penalty if you claim you made a good faith effort to report the losses properly.  However I'd think you'd have less of a case in filing the amended past returns since you reported them as capital losses previously and now are trying to reclassify those losses.


Title: Re: Taxes - a sanity check
Post by: loan_trader on March 11, 2014, 08:59:47 AM

I have a high marginal tax rate and a ton of capital loss carry-overs.  I'm making a solid net pre-tax return (12+%) but post-tax, it's about 3-4% because I cannot take the losses against the income.  I think the IRS would understand as I'm simply trying to pay tax on my net return from LC and Prosper.

Whoa, big difference in rates after the tax man takes his piece. I'm trying to wrap my head around a scenario that makes this better... Is there any way that this isn't as harsh (other than classifying as CPDI's, which I doubt holds much water). If you have short-term gains (elsewhere) to offset the short-term losses, does that make it better? 

So LC doesn't report any of the losses to the IRS?  If it's up to us to "qualify" them then maybe the CPDI isn't out of the question. sounds pretty murky and open to interpretation....
Title: Re: Taxes - a sanity check
Post by: core on March 11, 2014, 09:08:36 AM
The IRS has no way to verify the number we would insert as an ordinary loss (or as a cap loss for that matter) which seems like an invitation to an audit.

Very different than a brokerage 1099 which clearly shows the ST and LT cap gains/losses.

Basis reporting for such transactions did not begin until 2011.  Somehow we made it through nearly a century without the world ending.
Title: Re: Taxes - a sanity check
Post by: jpildis on March 11, 2014, 12:08:29 PM
I have a high marginal tax rate and a ton of capital loss carry-overs.  I'm making a solid net pre-tax return (12+%) but post-tax, it's about 3-4% because I cannot take the losses against the income.  I think the IRS would understand as I'm simply trying to pay tax on my net return from LC and Prosper.

You think the IRS would understand you bent the rules in your favor?  Good luck with that!

 ::)

Seriously though, I guess you can give it a shot, the worst that will happen is you'll get audited or they will rule against you.  You may not pay a penalty if you claim you made a good faith effort to report the losses properly.  However I'd think you'd have less of a case in filing the amended past returns since you reported them as capital losses previously and now are trying to reclassify those losses.

Based on my research, making these CPDI is actually more conservative than the LC & Prosper Approach... you lose the ability to get a reduced LT capital gains rate.  The IRS gets touch when you try to off-set income with made-up or tax-motivated transactions.  In this case, my looses are true losses and they are off-setting true gains from the very same security.  The CPDI rules were set-up to stop tax cheats.
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 11, 2014, 05:38:28 PM
Based on my research, making these CPDI is actually more conservative than the LC & Prosper Approach... you lose the ability to get a reduced LT capital gains rate.  The IRS gets touch when you try to off-set income with made-up or tax-motivated transactions.  In this case, my looses are true losses and they are off-setting true gains from the very same security.  The CPDI rules were set-up to stop tax cheats.

Yes, your loss is a loss, but I'm not sure what the word "true" is meant to imply.  Losing money is not inherently an ordinary loss.

If I understand your approach, you are independently making the determination that the notes are CPDI and you will report:

OID:  Interest income
1099B Charge offs:  Ordinary loss
1099B trading activity:  ST or LT cap gain / loss per each note traded

Take the charge offs on the ordinary income line and attach the statement from LC?

I can see an argument that says the interest not paid is an ordinary loss because they are reporting accrued interest, not actually paid, as pointed out in the prospectus:

"On the other hand, if a payment on a Note is not made in accordance with such payment schedule, for example because the borrower member did not make timely payment in respect of the corresponding member loan, a U.S. Holder will be required to include such amount of OID in taxable income as interest even though such interest has not been paid."

Unfortunately on defaults LC doesn't report the unpaid interest number, only the principal, so it's impossible to even know the amount of unpaid interest which could reasonably be deducted from the OID interest.  Is that the source of the CPDI rules - the difference between cash and accrual accounting?  The trade off is that since we're paying taxes on interest we never received, we can take the principal as ordinary loss?

So my understanding is that you've found or interpreted the IRS code regarding CPDI and concluded that you can take principal at default as ordinary loss.

Is that an accurate summary?  Can you direct me to the CPDI section of the IRS code that led you to that conclusion?

Like you I'm in a higher marginal bracket and also have significant cap loss carry forwards which makes the LC cap losses of no immediate value.  This is a critical point for any LC investor who would exceed the $3K cap gain deductibility limit so I appreciate your participation.  My own tax preparer doesn't know this area of the IRS code.
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 11, 2014, 05:42:45 PM

Whoa, big difference in rates after the tax man takes his piece. I'm trying to wrap my head around a scenario that makes this better... Is there any way that this isn't as harsh (other than classifying as CPDI's, which I doubt holds much water). If you have short-term gains (elsewhere) to offset the short-term losses, does that make it better?

So LC doesn't report any of the losses to the IRS?  If it's up to us to "qualify" them then maybe the CPDI isn't out of the question. sounds pretty murky and open to interpretation....

Cap losses certainly offset cap gains.  If you have less than a total of $3K of cap losses the subject is moot because you can deduct those as ordinary losses.

And yes, LC has left this very murky and open to interpretation.
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 11, 2014, 06:13:43 PM
This section from IRS publication http://www.irs.gov/publications/p1212/ar02.html#en_US_201312_publink1000206288 (http://www.irs.gov/publications/p1212/ar02.html#en_US_201312_publink1000206288) suggests that previously reported interest due to accrual accounting can be taken as a loss, but the principal is a capital loss.  It also says that if you take the CPDI approach, trading gains are also ordinary income:

Treatment of gain or loss on sale or exchange.   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss.
Title: Re: Taxes - a sanity check
Post by: jpildis on March 11, 2014, 07:53:41 PM
This section from IRS publication http://www.irs.gov/publications/p1212/ar02.html#en_US_201312_publink1000206288 (http://www.irs.gov/publications/p1212/ar02.html#en_US_201312_publink1000206288) suggests that previously reported interest due to accrual accounting can be taken as a loss, but the principal is a capital loss.  It also says that if you take the CPDI approach, trading gains are also ordinary income:

Treatment of gain or loss on sale or exchange.   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss.

I got my info from this publication: http://www.irs.gov/publications/p1212/ar02.html  (look about half way down for a section entitled - Contingent Payment Debt Instruments.

Here's the critical section on the capital portion of a CPDI:

Treatment of gain or loss on sale or exchange.   If you sell a contingent payment debt instrument at a gain, your gain is ordinary income (interest income), even if you hold the debt instrument as a capital asset. If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss.

Do what you will, Boatguy.  I think this is a reasonable approach and LC's or Prosper's thoughts on the taxabiity of their offering is moot.  It's between me and Mr. IRS.  This is a good faith, statute-supported, filing approach.  If the IRS disagrees, so be it.... I'm gonna fight the good fight.
Title: Re: Taxes - a sanity check
Post by: Rob L on March 11, 2014, 08:25:38 PM
May the force be with you.
Title: Re: Taxes - a sanity check
Post by: Boatguy on March 11, 2014, 09:16:50 PM
If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss.

That's the same document I quoted, but we're reading it differently.  I'm seeing "...ordinary loss to the extent of your prior OID accruals..." as meaning you can deduct the interest you never actually received.

And I also interpret the notes as capital assets, thus the losses are a capital loss.

I've been audited twice and both times the IRS owed me money.  I wish you the same luck!
Title: Re: Taxes - a sanity check
Post by: jpildis on March 12, 2014, 11:03:18 AM
If you sell a contingent payment debt instrument at a loss, your loss is an ordinary loss to the extent of your prior OID accruals on the debt instrument. If the debt instrument is a capital asset, treat any loss that is more than your prior OID accruals as a capital loss.

That's the same document I quoted, but we're reading it differently.  I'm seeing "...ordinary loss to the extent of your prior OID accruals..." as meaning you can deduct the interest you never actually received.

And I also interpret the notes as capital assets, thus the losses are a capital loss.

I've been audited twice and both times the IRS owed me money.  I wish you the same luck!

But you need to go to the section in the IRS document that talks specifically about CPDIs to get the proper treatment from capital losses & gains.  Thanks for the well wishes... still deciding if I should spend the money on a tax attorney consultation.
Title: Re: Taxes - a sanity check
Post by: investny on July 04, 2014, 12:35:47 AM

But you need to go to the section in the IRS document that talks specifically about CPDIs to get the proper treatment from capital losses & gains.  Thanks for the well wishes... still deciding if I should spend the money on a tax attorney consultation.

Did you talk to tax attorney?
How did everyone file their 2013 taxes?
Title: Re: Taxes - a sanity check
Post by: hoggy1 on July 05, 2014, 10:27:17 AM
From the same IRS publication 1212:

"Including OID in income.   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer.

Exceptions.   The rules for including OID in income as it accrues generally do not apply to the following debt instruments.

    U.S. savings bonds.

    Tax-exempt obligations. (However, see Tax-Exempt Bonds and Coupons, later.)

    Obligations issued by individuals before March 2, 1984.

    Loans of $10,000 or less between individuals who are not in the business of lending money. (The dollar limit includes outstanding prior loans by the lender to the borrower.) This exception does not apply if a principal purpose of the loan is to avoid any federal tax."


Why doesn't the bold exception cover all we little guys?
Title: Re: Taxes - a sanity check
Post by: neals384 on July 05, 2014, 11:04:36 AM
From the same IRS publication 1212:

"Including OID in income.   Generally, you include OID in income as it accrues each year, whether or not you receive any payments from the debt instrument issuer.

Exceptions.   The rules for including OID in income as it accrues generally do not apply to the following debt instruments.

    U.S. savings bonds.

    Tax-exempt obligations. (However, see Tax-Exempt Bonds and Coupons, later.)

    Obligations issued by individuals before March 2, 1984.

    Loans of $10,000 or less between individuals who are not in the business of lending money. (The dollar limit includes outstanding prior loans by the lender to the borrower.) This exception does not apply if a principal purpose of the loan is to avoid any federal tax."


Why doesn't the bold exception cover all we little guys?

Your notes are not loans to individuals.  Legally, they are notes issued by LC.
Title: Re: Taxes - a sanity check
Post by: Fred on July 05, 2014, 11:11:28 AM
    Loans of $10,000 or less between individuals who are not in the business of lending money. (The dollar limit includes outstanding prior loans by the lender to the borrower.) This exception does not apply if a principal purpose of the loan is to avoid any federal tax."

Why doesn't the bold exception cover all we little guys?

Technically, LC loans are issued not by us investors but by WebBank -- we do not actually "lend" our money; but we "invest" our money.  It is similar to buying, say, GE corporate bonds.  Bond investors do not lend money directly to GE.

In LC, we investors invest in member payment dependent notes.

http://www.sec.gov/Archives/edgar/data/1409970/000119312514124211/d634194d10k.htm
Quote
All Consumer Loans are funded and issued by WebBank.

also

Quote
Our platform offers consumer loans, which are unsecured obligations of individual borrowers that are issued in amounts ranging from $1,000 up to $35,000, depending on the applicable policy, with fixed interest rates, and three-year or five-year original maturities (“Consumer Loans”). Consumer Loans that have a FICO score of at least 660 and meet other strict credit criteria are classified as Public Policy Loans and are issued under WebBank’s Public Credit Policy and can be invested in through member payment dependent notes (“Notes”) pursuant to our shelf registration statement (“Note Shelf”).
Title: Re: Taxes - a sanity check
Post by: hoggy1 on July 05, 2014, 12:22:17 PM
Your notes are not loans to individuals.  Legally, they are notes issued by LC.

NO, "contractually" these notes are issued by LC.

I know all the issuance details (Webbank, loan from LC, etc) but I think the point is arguable particularly in that I expect this exception was written specifically to exempt small non-professional lenders from the accounting burden otherwise imposed by the regulations.

There is also the issue of materiality.

"  Materiality is an accounting concept which does not exist, for the most part, in tax law. Materiality is both a qualitative and quantitative concept used to identify those items most relevant and consequential in determining the correct tax liability. The materiality of an item may be measured in terms of its value and its relationship to another item of income, deduction, tax liability, credit, Schedule M-1 or Schedule M-2 adjustment, a balance sheet item or transaction as presented on a tax return, including supporting schedules.
    The process of evaluating materiality should be consistently applied, but the result will be different for each case. Absolute parameters cannot be established or used for every case because of the differing size, complexity and industry of the returns being examined, as well as the differences in the experience and professional judgment of examiners.
    In a LIFE examination, applying materiality principles is the most critical factor in limiting the scope of the examination. LIFE focuses on those issues most consequential to the overall tax liability, thereby, addressing the greatest compliance risks."
4.51.3.3.4

LC chooses to treat these loans as OID notes because it is/was easier or cheaper for them, and they contractually bound us (LC lender agreement) to agree to this treatment. There is no way in the world I would (nor would I ask my accountant to) ever even begin to jump into this accounting nightmare for a few hundred or even a few thousand dollars. I will add my LC interest to other interest income and report it on the appropriate line and report losses as discussed elsewhere in the thread. Done.

If challenged by the IRS I will print out my LC account activity for them and tell them to to recalculate my tax liability. If there is a difference in their favor I'll be happy to pay it. But they won't do it (been there before) because when the method used to report the income is demonstrated to them they could tell with a few pen strokes on the back of an envelop that the difference won't be material.

Just my opinion and plan.

Title: Re: Taxes - a sanity check
Post by: investny on July 09, 2014, 04:27:58 PM
Did anyone else look into CPDI?
Title: Re: Taxes - a sanity check
Post by: jpildis on July 09, 2014, 10:03:36 PM
That's how I filed... adjusted my OID interest with chargeoffs
Title: Re: Taxes - a sanity check
Post by: severancejoan on February 11, 2019, 07:07:31 AM
That's how I filed... adjusted my OID interest with chargeoffs

smart