Lend Academy Network Forum

Lending Club Discussion => Investors - LC => Topic started by: nonentity on February 11, 2015, 12:38:08 PM

Title: Not worth the returns after taxes.
Post by: nonentity on February 11, 2015, 12:38:08 PM
Is there a flaw in what I'm doing?

Say you are in the highest tax bracket and you earned 1,000,000 in total interest in your 1099 oid, but you have 400,000 of charge offs. So you have 600,000 net gain for the year.

But you have to pay 50 percent taxes (federal and CA state) on 1,000,000 due to your tax bracket. Now you owe 500,000 and you actually make 100,000 on 1,000,000 interest after taxes and charge offs.

So if you had 8 percent return on a 12.5 million account which earned 1,000,000 in interest but you actually net 100,000, your true return after taxes and charge offs is 0.8 percent.

Of course you can take the 400,000 charge offs as a capital loss, but assume you didn't take any capital gains in 2014.


Now in my personal account the oid interest is 8,000 and my losses is 3,000. My net gain is 5000 but I pay taxes on the 8000.  In my 34 percent tax bracket that means I have to pay 2720 on 8000, which means after taxes and charge offs my net gain is 2280. This makes it feel like a 54.4 percent tax rate on the 5000 net gain.  If I only had to pay 34% on the 5000 I would have to pay 1700, 1000 less than what I actually owe.

Not worth it. After 3+ years I'm withdrawing my lending club funds and not going to reinvest. Once the charge offs start piling up and eating into your interest, taxes end up killing your gains.
Title: Re: Not worth the returns after taxes.
Post by: stanny2 on February 11, 2015, 12:53:32 PM
Wouldn't the 3,000 in losses be a capital loss, above the line deduction? That would then lower your tax burden $1,020 @34%...not a CPA, so can't say this is correct.
Title: Re: Not worth the returns after taxes.
Post by: Fred93 on February 11, 2015, 12:54:10 PM
in my personal account the oid interest is 8,000 and my losses is 3,000.

What are you doing that makes your losses so darn high?  That's one problem. 

Quote
My net gain is 5000 but I pay taxes on the 8000.

That's not right.  You should be writing off the losses, so that at the end you're paying tax on the 5000.
Title: Re: Not worth the returns after taxes.
Post by: nonentity on February 11, 2015, 01:00:56 PM
in my personal account the oid interest is 8,000 and my losses is 3,000.

What are you doing that makes your losses so darn high?  That's one problem. 

Quote
My net gain is 5000 but I pay taxes on the 8000.

That's not right.  You should be writing off the losses, so that at the end you're paying tax on the 5000.

Yes, the 3000 is a capital loss, and I used that to offset my capital gains and I could use that to offset my interest income up to 3000 also like you said if I had no capital gains. But the issue still remains, once you reach over the 3000 limit you can't take the more than a 3000 loss against interest income. Once your losses pile up which it eventually will in mature accounts, it feels like the tax burden increase while your gains decrease.
Title: Re: Not worth the returns after taxes.
Post by: Fred93 on February 11, 2015, 01:22:55 PM
But the issue still remains, once you reach over the 3000 limit you can't take the more than a 3000 loss against interest income.

Ok, so it is really the 3000 limit that bothers you.  Most people have some capital gains from stock market investments, which makes this not a problem.  In any case, you don't lose the capital loss over the 3000.  It rolls forward to the next year. 

The 3000 limit is a stupid feature of the tax code.

You didn't answer why you have such large losses.
Title: Re: Not worth the returns after taxes.
Post by: nonentity on February 11, 2015, 01:45:05 PM
But the issue still remains, once you reach over the 3000 limit you can't take the more than a 3000 loss against interest income.

Ok, so it is really the 3000 limit that bothers you.  Most people have some capital gains from stock market investments, which makes this not a problem.  In any case, you don't lose the capital loss over the 3000.  It rolls forward to the next year. 

The 3000 limit is a stupid feature of the tax code.

You didn't answer why you have such large losses.

I don't think they are such large losses. My adjusted NAR is 8.06 for an $87000 account almost 4 years old.


Yes, the limit is the problem. If you could subtract the charge offs of any amount against the interest  then everything would be fine and dandy, but you can't and have to pay taxes on the full interest earned even if you only net 60 percent of it. For large accounts, this is a huge problem like I gave the example above.  It's just something I feel makes it not worth doing anymore. I'll just stick to dividend etfs for passive income.


Title: Re: Not worth the returns after taxes.
Post by: Lovinglifestyle on February 11, 2015, 03:37:57 PM
This issue ($3,000 limit, rising losses, declining life span) concerns me also.  I'm putting additional investment on hold while I watch what happens to the lates I no longer want to sell at deep discounts.  2013 and 2014 were/are both over the 3K limit and I have no offsetting gain.
Title: Re: Not worth the returns after taxes.
Post by: mchu168 on February 11, 2015, 04:06:54 PM
I live in CA and pay 50%+ incremental taxes on investment income too.  You are right that the after tax returns are unattractive/too low. Munis offer better risk/reward for taxable funds, imo.  I also like some of the leveraged corporate bond CEFs for yield.

I stopped investing in P2P loans with taxable money.  I'm only investing IRA money now.   Once I retire and move out of CA, I will probably start putting taxable money back into P2P loans.
Title: Re: Not worth the returns after taxes.
Post by: Theta on February 11, 2015, 04:29:25 PM
Yes, this is a problem for taxable accounts.   I think a work around might be to do the investment though a fund.  There was a report that LC was going to set up a public closed end fund for their loans so people could easily invest.  If they did that then the CEF would be subject to SEC rules Investment Company Act of 1940 and could offset the losses from gains.  At lease I think so.  I haven't heard anything about the LC CEF since it was initially mentioned in 2013.
Title: Re: Not worth the returns after taxes.
Post by: kya on February 11, 2015, 07:47:11 PM
i hate to say it but my lc and prosper accounts are just a "hobby" a cef muni fund like men, mmu or vki three of over a hundred make better sense..also sell at a discount to net asset value
Title: Re: Not worth the returns after taxes.
Post by: AnilG on February 11, 2015, 08:55:02 PM
Are you all only investing in P2P lending and not in other investments such as mutual funds, ETF, and stocks? The statement of no capital gains from other investments to offset against capital losses from P2P lending makes me concerned that may be people are not diversified across different investment asset classes.

If last year you didn't generate enough capital gains from other investments to offset capital losses from P2P lending, your portfolio might be unbalanced. P2P lending is still a young untested unproven asset class and shouldn't be more than tiny bit of your total portfolio.

Capital gains is taxed at 15% and interest income is taxed at your ordinary income tax rate. If your effective ordinary income tax rate is higher than 15%, it makes sense to convert some of the interest income into capital gains by selling the notes on secondary market at premium.
Title: Re: Not worth the returns after taxes.
Post by: mchu168 on February 11, 2015, 10:57:04 PM
I have a buy and hold strategy, so I have almost no capital gains.  Also, capital gains are now taxed at 20% in higher tax brackets.  Add on top of that an 11%+ CA state tax and the Obamacare 3.8% surcharge, and it makes sense to never sell anything in a diversified portfolio.... never, ever.
Title: Re: Not worth the returns after taxes living in CA and very high income.
Post by: lascott on February 11, 2015, 11:51:11 PM
I have a buy and hold strategy, so I have almost no capital gains.  Also, capital gains are now taxed at 20% in higher tax brackets.  Add on top of that an 11%+ CA state tax and the Obamacare 3.8% surcharge, and it makes sense to never sell anything in a diversified portfolio.... never, ever.

Little perspective here for everyone reading this thread.  This is only an issue for a small percentage of people in certain states and with very high incomes (39%+11% taxes). Not the typical retail investor.

(https://forum.lendacademy.com/proxy.php?request=http%3A%2F%2Fi.imgur.com%2FJT3mwU7.png&hash=f30630e85a17e14818f89cac8b14e392)
http://www.schwab.com/public/schwab/nn/articles/Taxes-Whats-New
Title: Re: Not worth the returns after taxes.
Post by: jpildis on February 12, 2015, 10:27:23 AM
I highly recommend that you research the IRS rules for Contingent Payment Debt Instruments... if you look at the definition of CPDIs and the structure of LC investments, one can make a strong argument that LC notes are, indeed, CPDIs.  If you come to that conclusion, capital gains and losses are treated as normal income and will either add or subtract from your OID income.

This is not tax advice and you should always discuss matters like this with a tax professional.
Title: Re: Not worth the returns after taxes.
Post by: BruiserB on February 12, 2015, 12:19:39 PM
I highly recommend that you research the IRS rules for Contingent Payment Debt Instruments... if you look at the definition of CPDIs and the structure of LC investments, one can make a strong argument that LC notes are, indeed, CPDIs.  If you come to that conclusion, capital gains and losses are treated as normal income and will either add or subtract from your OID income.

This is not tax advice and you should always discuss matters like this with a tax professional.

There was a post in the forums a couple of years ago regarding this by AmCap.  I'm not sure if he's still active here.

http://www.lendacademy.com/forum/index.php?topic=805.0

There he said:

Quote
Per Code Section 166, non business bad debts are treated as short term capital losses, regardless of how long you've held the debt instrument.  See generally, http://www.fool.com/school/taxes/2000/taxes000107.htm
for why that matters.  If you have net short-term capital loss, you can deduct against ordinary income up to $3k per year.
 
Note that the mandatory short-term rule only applies to losses, not to gains.  If you buy a note, hold it for a year, and sell for a gain over your adjusted basis, you get long-term capital gain (yippee!).

So he seemed to argue that any losses should be taken as short term losses (therefore at your normal marginal rate) but still subject to a maximum $3000 yearly loss after offsetting any gains.  I've also seen this CPDI argument, which sounds completely reasonable.  And then starting with last year I get the Lending Club Tax Guide with my 1099 which tells me to take notes held less than a year as short term losses and notes held more than a year as long term losses. 

Bottom line, there seems to be no consistent recommendation of what to do.  It would certainly be to LendingClub's advantage to be proponents of the CPDI approach as it would simply allow investors to deduct losses from our OID income and give the best possible tax treatment to the losses.  Why don't they do this?  There must be some reason they feel that their notes don't qualify as CPDIs.....even though your argument that they should seems equally reasonable to me.

I wouldn't mind being more aggressive in declaring my losses.  As I understand it, if you make a mistake in good faith and are audited you will simply pay the corrected tax amount and maybe some interest, but won't be penalized.  But if I were to consider my losses as losses on CPDIs, how would I show that on my taxes?  I can't simply reduce my OID income by the loss amount, or things won't match up when the IRS compares my declared interest vs what's been reported to them on 1099s.  Is there a specific line one would enter this loss on?  And more specifically, what Turbo-Tax question would I answer so that it asks me for my CPDI losses?
Title: Re: Not worth the returns after taxes.
Post by: bobeubanks on February 12, 2015, 12:26:32 PM
This is not tax advice and you should always discuss matters like this with a tax professional.

I also would recommend talking to a tax professional before claiming LC note are conditional payment obligations. The tax professional might want to refer specifically to 26 CFR 1.1275-4 (3) Insolvency and default. A payment is not contingent merely because of the possibility of impairment by insolvency, default, or similar circumstances.
Title: Re: Not worth the returns after taxes.
Post by: bobeubanks on February 12, 2015, 12:47:31 PM
I wouldn't mind being more aggressive in declaring my losses.  As I understand it, if you make a mistake in good faith and are audited you will simply pay the corrected tax amount and maybe some interest, but won't be penalized.  But if I were to consider my losses as losses on CPDIs, how would I show that on my taxes?  I can't simply reduce my OID income by the loss amount, or things won't match up when the IRS compares my declared interest vs what's been reported to them on 1099s.  Is there a specific line one would enter this loss on?  And more specifically, what Turbo-Tax question would I answer so that it asks me for my CPDI losses?

Publication 1212 cover re-figuring the amounts reported on 1099-OID for contingent payment debt instruments. I think you'll find after reading it that trying to shoehorn LC notes into being a contingent payment debt instrument is problematic. I also doubt Turbo Tax will comprehend the complicated re-figuring required.
Title: Re: Not worth the returns after taxes.
Post by: standby on February 12, 2015, 02:58:37 PM
PennySaved had a nice tax thread last year I used info to help do my filing. 

http://www.lendacademy.com/forum/index.php?topic=805.30

The way I look at it, losses come off the top as an operating expense.  Until you exceed that I don't think you are going to need to worry about a Capital Loss Carryover.
Title: Re: Not worth the returns after taxes.
Post by: jpildis on February 12, 2015, 04:53:05 PM
I highly recommend that you research the IRS rules for Contingent Payment Debt Instruments... if you look at the definition of CPDIs and the structure of LC investments, one can make a strong argument that LC notes are, indeed, CPDIs.  If you come to that conclusion, capital gains and losses are treated as normal income and will either add or subtract from your OID income.

This is not tax advice and you should always discuss matters like this with a tax professional.

There was a post in the forums a couple of years ago regarding this by AmCap.  I'm not sure if he's still active here.

http://www.lendacademy.com/forum/index.php?topic=805.0

There he said:

Quote
Per Code Section 166, non business bad debts are treated as short term capital losses, regardless of how long you've held the debt instrument.  See generally, http://www.fool.com/school/taxes/2000/taxes000107.htm
for why that matters.  If you have net short-term capital loss, you can deduct against ordinary income up to $3k per year.
 
Note that the mandatory short-term rule only applies to losses, not to gains.  If you buy a note, hold it for a year, and sell for a gain over your adjusted basis, you get long-term capital gain (yippee!).

So he seemed to argue that any losses should be taken as short term losses (therefore at your normal marginal rate) but still subject to a maximum $3000 yearly loss after offsetting any gains.  I've also seen this CPDI argument, which sounds completely reasonable.  And then starting with last year I get the Lending Club Tax Guide with my 1099 which tells me to take notes held less than a year as short term losses and notes held more than a year as long term losses. 

Bottom line, there seems to be no consistent recommendation of what to do.  It would certainly be to LendingClub's advantage to be proponents of the CPDI approach as it would simply allow investors to deduct losses from our OID income and give the best possible tax treatment to the losses.  Why don't they do this?  There must be some reason they feel that their notes don't qualify as CPDIs.....even though your argument that they should seems equally reasonable to me.

I wouldn't mind being more aggressive in declaring my losses.  As I understand it, if you make a mistake in good faith and are audited you will simply pay the corrected tax amount and maybe some interest, but won't be penalized.  But if I were to consider my losses as losses on CPDIs, how would I show that on my taxes?  I can't simply reduce my OID income by the loss amount, or things won't match up when the IRS compares my declared interest vs what's been reported to them on 1099s.  Is there a specific line one would enter this loss on?  And more specifically, what Turbo-Tax question would I answer so that it asks me for my CPDI losses?

Last year, I used the adjustment screen right after you enter the OID information... I think there was a box you could check that said 'I need to adjust the interest reported'.

I don't think the tax code contemplates how to deal with P2P loans.  LC chose to view Folio transaction and charge-offs as capital gains.  I disagree with their assessment and think that the gains and losses from my investment in LC should all be taxed at regular income rates and not get capital gain treatment.  Taxpayers try all sorts of schemes to convert income to capital gains so they get lower taxes.  I'm proposing just the opposite and think it's justified legally based on the ambiguity of the situation and, more importantly to me, it's ethically justified... I put money into LC and I'm getting taxed at a high marginal rate on my total return from the investment, the opposite of an abusive tax shelter.

Again, I'm not a tax professional and nobody should feel comforted by my personal feeling.
Title: Re: Not worth the returns after taxes.
Post by: daniel2023 on February 13, 2015, 09:17:27 AM
I also was starting to feel this way after working through my taxes a few weeks ago.  I am in the 15% bracket, so capital gains/losses do nothing for my tax situation, since they are at 0%.  So I am getting hit with taxes on full interest without any adjustment for losses.  My self calculated return has been just over 10%, but factoring in taxes on full OID makes me believe my after tax return is closer to 5.5%.  While this isn't terrible, I'm thinking it may not be work the added time compared to some mutual funds out there, especially given that my target interest rate on loans is around 18%.

I recently decided to stop new contributions (account just over 11K), and am thinking I will let this be the extent of my play money to see how this stuff pans out.  And just in case anyone is wondering about my lower income bracket, LC is less than 10% of my total savings portfolio. 
Title: Re: Not worth the returns after taxes.
Post by: mchu168 on February 13, 2015, 11:52:46 AM
Instead of playing armchair CPA, just use IRA money to invest in LC.  What's the big dealio? Don't overthink it.
Title: Re: Not worth the returns after taxes.
Post by: bobeubanks on February 13, 2015, 12:17:42 PM
Instead of playing armchair CPA, just use IRA money to invest in LC.  What's the big dealio? Don't overthink it.
Perhaps some people are investing for current income?
Title: Re: Not worth the returns after taxes.
Post by: mchu168 on February 13, 2015, 07:13:29 PM
Instead of playing armchair CPA, just use IRA money to invest in LC.  What's the big dealio? Don't overthink it.
Perhaps some people are investing for current income?

I'd invest in some more tax efficient sources of income.  CEF muni funds, as someone else mentioned are a better alternative for taxable funds, imo.  Since everyone here is an accredited investor with $1m of assets or $300k of income, it should be easy to arrange your portfolio to put P2P loans in an IRA and equities, tax efficient assets in a taxable brokerage account.  It's not that complicated...
Title: Re: Not worth the returns after taxes.
Post by: rawraw on February 13, 2015, 08:04:45 PM
Instead of playing armchair CPA, just use IRA money to invest in LC.  What's the big dealio? Don't overthink it.
Perhaps some people are investing for current income?

I'd invest in some more tax efficient sources of income.  CEF muni funds, as someone else mentioned are a better alternative for taxable funds, imo.  Since everyone here is an accredited investor with $1m of assets or $300k of income, it should be easy to arrange your portfolio to put P2P loans in an IRA and equities, tax efficient assets in a taxable brokerage account.  It's not that complicated...
I think you've confused the LendingClub investor financial criteria with some other website.   Unless you are in one of the couple states that have even stricter requirements.
Title: Re: Not worth the returns after taxes.
Post by: mchu168 on February 14, 2015, 08:39:43 AM
Instead of playing armchair CPA, just use IRA money to invest in LC.  What's the big dealio? Don't overthink it.
Perhaps some people are investing for current income?

I'd invest in some more tax efficient sources of income.  CEF muni funds, as someone else mentioned are a better alternative for taxable funds, imo.  Since everyone here is an accredited investor with $1m of assets or $300k of income, it should be easy to arrange your portfolio to put P2P loans in an IRA and equities, tax efficient assets in a taxable brokerage account.  It's not that complicated...
I think you've confused the LendingClub investor financial criteria with some other website.   Unless you are in one of the couple states that have even stricter requirements.

I thot you had to be an accredited investor to invest in LC. My mistake.
Title: Not worth the returns after taxes.
Post by: BruiserB on February 14, 2015, 09:04:00 AM

Instead of playing armchair CPA, just use IRA money to invest in LC.  What's the big dealio? Don't overthink it.
Perhaps some people are investing for current income?

I'd invest in some more tax efficient sources of income.  CEF muni funds, as someone else mentioned are a better alternative for taxable funds, imo.  Since everyone here is an accredited investor with $1m of assets or $300k of income, it should be easy to arrange your portfolio to put P2P loans in an IRA and equities, tax efficient assets in a taxable brokerage account.  It's not that complicated...
I think you've confused the LendingClub investor financial criteria with some other website.   Unless you are in one of the couple states that have even stricter requirements.

I thot you had to be an accredited investor to invest in LC. My mistake.

The unfortunate thing for accredited investors is that they aren't eligible for Roth IRAs and their normal IRA contributions wouldn't  be tax deductible.

I'm not to the point where I quality as an accredited investor, but I am past the threshold for being able to get maximum advantage from an IRA.  However I did decide to make contributions to a regular IRA even though they aren't deductible.  I use my taxable LC account to generate enough each year to fund the IRA contribution and then it can continue to grow tax free.

I guess there is a way for higher income people to then convert this normal IRA to a Roth IRA.....basically a back door way to get a Roth IRA even though you are past the income limit for directly contributing. I haven't quite got that figured out yet.


Sent from my iPhone using Tapatalk
Title: Re: Not worth the returns after taxes.
Post by: Fee on February 14, 2015, 10:06:52 AM

Instead of playing armchair CPA, just use IRA money to invest in LC.  What's the big dealio? Don't overthink it.
Perhaps some people are investing for current income?

I'd invest in some more tax efficient sources of income.  CEF muni funds, as someone else mentioned are a better alternative for taxable funds, imo.  Since everyone here is an accredited investor with $1m of assets or $300k of income, it should be easy to arrange your portfolio to put P2P loans in an IRA and equities, tax efficient assets in a taxable brokerage account.  It's not that complicated...
I think you've confused the LendingClub investor financial criteria with some other website.   Unless you are in one of the couple states that have even stricter requirements.

I thot you had to be an accredited investor to invest in LC. My mistake.

The unfortunate thing for accredited investors is that they aren't eligible for Roth IRAs and their normal IRA contributions wouldn't  be tax deductible.

I'm not to the point where I quality as an accredited investor, but I am past the threshold for being able to get maximum advantage from an IRA.  However I did decide to make contributions to a regular IRA even though they aren't deductible.  I use my taxable LC account to generate enough each year to fund the IRA contribution and then it can continue to grow tax free.

I guess there is a way for higher income people to then convert this normal IRA to a Roth IRA.....basically a back door way to get a Roth IRA even though you are past the income limit for directly contributing. I haven't quite got that figured out yet.


Sent from my iPhone using Tapatalk

The backdoor Roth is the way to go, at least until Obama kills it.
Title: Re: Not worth the returns after taxes.
Post by: bobeubanks on February 14, 2015, 11:22:39 AM
The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.
Title: Re: Not worth the returns after taxes.
Post by: Fee on February 14, 2015, 11:25:16 AM
The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

If you have a current employer sponsored plan, you can roll them into it first. If not, I guess you're right.
Title: Re: Not worth the returns after taxes.
Post by: mchu168 on February 15, 2015, 10:36:07 PM
An after tax IRA contribution is an option too. Contribution is not tax deferred but tax deferred income is still good.  My previous employer let us put $52k of after tax money into the 401k each year.  After I left, I rolled that money into LC.

Just ask yourself, what would Mitt do...

http://www.bloomberg.com/news/articles/2014-09-17/how-to-join-9-000-u-s-taxpayers-with-romney-sized-iras

Title: Re: Not worth the returns after taxes.
Post by: lascott on February 16, 2015, 02:15:13 AM
An after tax IRA contribution is an option too. Contribution is not tax deferred but tax deferred income is still good.  My previous employer let us put $52k of after tax money into the 401k each year.  After I left, I rolled that money into LC.<snip>
That sort of thing can be done to move it to a ROTH IRA (even annually). Fidelity will do this, as one example.
Title: Re: Not worth the returns after taxes.
Post by: mchu168 on February 16, 2015, 09:25:44 AM
An after tax IRA contribution is an option too. Contribution is not tax deferred but tax deferred income is still good.  My previous employer let us put $52k of after tax money into the 401k each year.  After I left, I rolled that money into LC.<snip>
That sort of thing can be done to move it to a ROTH IRA (even annually). Fidelity will do this, as one example.

Yep I believe this is allowed for after tax 401k money now. IRS made the change this year.

I'm still waiting for the IRS to fix the whole pro-rata conversion mess.  Maybe if we get Jeb into the WH...
Title: Re: Not worth the returns after taxes.
Post by: BruiserB on February 16, 2015, 02:29:39 PM
The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?
Title: Re: Not worth the returns after taxes.
Post by: Fee on February 16, 2015, 02:43:34 PM
The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?

Do NOT liquidate your notes. SDIRA will take care of everything. LC will not be involved. I would make both your 2014 and 2015 contribution now if feasible to make it more simple. I just did a conversion but am unsure if I will need to open a completely new Trad account next year or if they will let me keep the first one open for the future. Please let us know what they tell you.
Title: Not worth the returns after taxes.
Post by: BruiserB on February 16, 2015, 04:57:30 PM

The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?

Do NOT liquidate your notes. SDIRA will take care of everything. LC will not be involved. I would make both your 2014 and 2015 contribution now if feasible to make it more simple. I just did a conversion but am unsure if I will need to open a completely new Trad account next year or if they will let me keep the first one open for the future. Please let us know what they tell you.

This would be ideal....I've already made contributions for 2013, 2014, and 2015.  So I have invested $16,500.  My current account value is around $18,500. 

So you're saying that SDIRA can merely change the account to a Roth IRA and I would pay tax on $2,000 in gains that I have so far on my 2015 taxes?  As you say if I don't involve LC, then I will keep the same LC account number....SDIRA will just "move" that account from being held in a Traditional IRA to being held in a Roth IRA.  Did SDIRA assign you a new account number with them?  Maybe I'll give them a call and check out options.  Were they easy to deal with?




Sent from my iPhone using Tapatalk
Title: Re: Not worth the returns after taxes.
Post by: Fee on February 16, 2015, 05:46:35 PM

The backdoor Roth is the way to go, at least until Obama kills it.

If you have substantial traditional IRA(s) already, backdoor Roth isn't really an option.

My only traditional IRA holdings are in LendingClub and were made with non-deductible contributions.  So I would only pay tax on my gains for the last two years if I converted to Roth.

My question is, do I need to liquidate my notes and then transfer the money to a new Roth IRA account at LC?  Or is there a way I can have Self Directed IRA Services (the company that administers the IRA for LC) just convert the IRA to a Roth IRA with the current notes in it?  If I can, that would be simple, but then I'd have to open a new traditional IRA account next year to make the initial contribution and then convert it to a Roth?  Or do I make next year's cash contribution to the traditional account, but instead of buying any notes, immediately move the cash portion of the account to a Roth account?  Basically, what's the simplest way to do the initial conversion and to be set up for making it easiest in the future?

Do NOT liquidate your notes. SDIRA will take care of everything. LC will not be involved. I would make both your 2014 and 2015 contribution now if feasible to make it more simple. I just did a conversion but am unsure if I will need to open a completely new Trad account next year or if they will let me keep the first one open for the future. Please let us know what they tell you.

This would be ideal....I've already made contributions for 2013, 2014, and 2015.  So I have invested $16,500.  My current account value is around $18,500. 

So you're saying that SDIRA can merely change the account to a Roth IRA and I would pay tax on $2,000 in gains that I have so far on my 2015 taxes?  As you say if I don't involve LC, then I will keep the same LC account number....SDIRA will just "move" that account from being held in a Traditional IRA to being held in a Roth IRA.  Did SDIRA assign you a new account number with them?  Maybe I'll give them a call and check out options.  Were they easy to deal with?




Sent from my iPhone using Tapatalk

They were great to deal with. I had opened my account with them with a Roth IRA contribution. I later realized that my wife and I were over the Roth contribution income limit so I had it recharachterized to a Trad IRA. Once that was settled, I converted the Trad back to a Roth and was able to use the same, original Roth IRA account number.

Your best bet is to call them directly since our situations are a little different. I don't want to try and give you tax guidance since I am not a professional and could inadvertently lead you astray.
Title: Re: Not worth the returns after taxes.
Post by: BruiserB on February 16, 2015, 06:32:15 PM
Appreciate the feedback, Fee!  Just good to know they are easy to deal with.  I've never spoken to anyone there as I handled the account opening through the LC website and have just mailed in my contribution each year.  It would be awesome if they can make it super simple!
Title: Re: Not worth the returns after taxes.
Post by: rockinray on February 22, 2015, 10:53:48 AM
So let me make sure I understand this... I'm kind of dumb from time to time.   :o

My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?

Am I understanding this correctly?
Title: Re: Not worth the returns after taxes.
Post by: rawraw on February 22, 2015, 12:05:32 PM
So let me make sure I understand this... I'm kind of dumb from time to time.   :o

My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?

Am I understanding this correctly?
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA
Title: Re: Not worth the returns after taxes.
Post by: rockinray on February 22, 2015, 12:21:43 PM
So let me make sure I understand this... I'm kind of dumb from time to time.   :o

My wife and I already max our 401k, HSA, and Roth IRA's, and we do not qualify for a traditional "pre-tax" IRA. But, if I read correctly here, I can open an IRA and fund it without the tax credit, and everything grows tax free until I start to pull it out?

Am I understanding this correctly?
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

Thanks rawraw!

I'm gong to visit our accountant this week about this to see what he has to say too.

Title: Re: Not worth the returns after taxes.
Post by: Fred on February 22, 2015, 03:41:22 PM
http://www.bogleheads.org/wiki/Backdoor_Roth_IRA

And this is the "convert-or-not-convert" calculator used by Vanguard:

http://www.archimedes.com/vanguard/roth/RothConsumer.phtml
Title: Re: Not worth the returns after taxes.
Post by: chasingbread on April 13, 2017, 04:37:01 AM
I highly recommend that you research the IRS rules for Contingent Payment Debt Instruments... if you look at the definition of CPDIs and the structure of LC investments, one can make a strong argument that LC notes are, indeed, CPDIs.  If you come to that conclusion, capital gains and losses are treated as normal income and will either add or subtract from your OID income.

This is not tax advice and you should always discuss matters like this with a tax professional.

There was a post in the forums a couple of years ago regarding this by AmCap.  I'm not sure if he's still active here.

http://www.lendacademy.com/forum/index.php?topic=805.0

There he said:

Quote
Per Code Section 166, non business bad debts are treated as short term capital losses, regardless of how long you've held the debt instrument.  See generally, http://www.fool.com/school/taxes/2000/taxes000107.htm
for why that matters.  If you have net short-term capital loss, you can deduct against ordinary income up to $3k per year.
 
Note that the mandatory short-term rule only applies to losses, not to gains.  If you buy a note, hold it for a year, and sell for a gain over your adjusted basis, you get long-term capital gain (yippee!).

So he seemed to argue that any losses should be taken as short term losses (therefore at your normal marginal rate) but still subject to a maximum $3000 yearly loss after offsetting any gains.  I've also seen this CPDI argument, which sounds completely reasonable.  And then starting with last year I get the Lending Club Tax Guide with my 1099 which tells me to take notes held less than a year as short term losses and notes held more than a year as long term losses. 

Bottom line, there seems to be no consistent recommendation of what to do.  It would certainly be to LendingClub's advantage to be proponents of the CPDI approach as it would simply allow investors to deduct losses from our OID income and give the best possible tax treatment to the losses.  Why don't they do this?  There must be some reason they feel that their notes don't qualify as CPDIs.....even though your argument that they should seems equally reasonable to me.

I wouldn't mind being more aggressive in declaring my losses.  As I understand it, if you make a mistake in good faith and are audited you will simply pay the corrected tax amount and maybe some interest, but won't be penalized.  But if I were to consider my losses as losses on CPDIs, how would I show that on my taxes?  I can't simply reduce my OID income by the loss amount, or things won't match up when the IRS compares my declared interest vs what's been reported to them on 1099s.  Is there a specific line one would enter this loss on?  And more specifically, what Turbo-Tax question would I answer so that it asks me for my CPDI losses?

Last year, I used the adjustment screen right after you enter the OID information... I think there was a box you could check that said 'I need to adjust the interest reported'.

I don't think the tax code contemplates how to deal with P2P loans.  LC chose to view Folio transaction and charge-offs as capital gains.  I disagree with their assessment and think that the gains and losses from my investment in LC should all be taxed at regular income rates and not get capital gain treatment.  Taxpayers try all sorts of schemes to convert income to capital gains so they get lower taxes.  I'm proposing just the opposite and think it's justified legally based on the ambiguity of the situation and, more importantly to me, it's ethically justified... I put money into LC and I'm getting taxed at a high marginal rate on my total return from the investment, the opposite of an abusive tax shelter.

Again, I'm not a tax professional and nobody should feel comforted by my personal feeling.


Ok, so, If I chose to report my gains/losses as ordinary income......

1. I would NOT report a 1099-B?
2. I would subtract my losses from my OID
3. Adjust my OID in Turbotax
4. Which is the correct reason? reduce by accrued interest, adjust the amount payer reported or "other reasons"

In my case, OID is $54K, losses (cost basis) is $21K. My adjusted OID amount would be $33K

This would be the difference between me paying $9K and not paying anything...I am willing to explain my justification based off everything I read here and about CPDI.

@jpildis is this how you did it? Have you gotten audited? Did you get audited after amending your returns? I have consistently paid 7K or more every yr.

Title: Re: Not worth the returns after taxes.
Post by: rubicon on April 13, 2017, 06:54:32 AM
Please check out this
http://www.aba.com/Tools/Offers/Documents/Chapman_Regulation_Marketplace_Lending_0317.pdf

Specifically page 90. Lending Club chooses to treat the Notes as Debt.

The Debt Approach also requires that the Operator and the investors treat the Platform Notes as debt instruments issued with original issue discount, or “OID.”


Platform Notes treated as debt instruments, and treated as issued by the Operators, would be subject to the OID rules to the extent that interest on those notes is not regarded as “unconditionally payable”—a reasonable assumption given that interest is payable only to the extent received on an underlying Borrower Loan.

Title: Re: Not worth the returns after taxes.
Post by: chasingbread on April 13, 2017, 06:54:30 PM
Please check out this
http://www.aba.com/Tools/Offers/Documents/Chapman_Regulation_Marketplace_Lending_0317.pdf

Specifically page 90. Lending Club chooses to treat the Notes as Debt.

The Debt Approach also requires that the Operator and the investors treat the Platform Notes as debt instruments issued with original issue discount, or “OID.”


Platform Notes treated as debt instruments, and treated as issued by the Operators, would be subject to the OID rules to the extent that interest on those notes is not regarded as “unconditionally payable”—a reasonable assumption given that interest is payable only to the extent received on an underlying Borrower Loan.


Thanks for the reference! I am getting schooled on all this in the forum. What I understand by what jpildis is saying, is that LC has interpreted the law as treating it as the "debt approach."

I am looking for anyone's input on how to actual input it into Turbotax.

As of right now, I adjusted the OID under "other reasons" and eliminated my capital gains losses. When i went to an accountant, they just wrote it off as capital gains which did not help much.
Title: Re: Not worth the returns after taxes.
Post by: Fred93 on April 13, 2017, 09:59:24 PM
As of right now, I adjusted the OID under "other reasons" and eliminated my capital gains losses.

You have zero justification for doing that. 

I'm not tellin' you how to do your taxes, but I would want a justification based on something in the tax code or tax regulations that says you can do that before I'd do it.  If you haven't found justification in the code or regs, then you're just makin' stuff up.  Most accountants and tax preparers would feel the same way.
Title: Re: Not worth the returns after taxes.
Post by: BruiserB on April 13, 2017, 10:34:49 PM
Back when this thread started I think Lending Club was just issuing a 1099OID and then gave you a list of your written off notes and you basically had to figure out how to make the adjustment yourself.  They didn't issue a 1099B form basically declaring them as Capital Losses.  So there was a lot more doubt on how to report these on taxes and I think one could build a better case for interpreting the rules in different ways should the IRS have audited you.  However the last few years Lending Club has issued the 1099B forms and even provided their guide to do taxes even though I believe they still disclaim that it is tax advice.  You can certainly choose to report things differently than Lending Club recommends, but you should be aware that the red flags will go up when the IRS notices that you had 1099B transactions that you didn't report and they will probably wonder why you adjusted the OID number.  Those red flags may cause an audit and then you will get the opportunity to explain to them in person why you decided to do what you did.  Let us know how it turns out.