Capital Gains on Folio Purchasing

[Bohb Daishi]

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.

[bobeubanks]

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.

[yojoakak]

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?

[core]

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. 

[Fred]

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.

[Bohb Daishi]

"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.

[Keltset]

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....

[Bohb Daishi]

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.