Author Topic: Capital Gains on Folio Purchasing  (Read 13361 times)

Bohb Daishi

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Capital Gains on Folio Purchasing
« 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.


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LC Adv

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Re: Capital Gains on Folio Purchasing
« Reply #1 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

PeerSocialLending

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Re: Capital Gains on Folio Purchasing
« Reply #2 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!
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BruiserB

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Re: Capital Gains on Folio Purchasing
« Reply #3 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.

yojoakak

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Re: Capital Gains on Folio Purchasing
« Reply #4 on: January 27, 2014, 05:29:10 PM »
Can't you just use whatever LendingClub sends you?

Brian

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Re: Capital Gains on Folio Purchasing
« Reply #5 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.
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Bohb Daishi

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Re: Capital Gains on Folio Purchasing
« Reply #6 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.
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New Jersey Guy

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Re: Capital Gains on Folio Purchasing
« Reply #7 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.

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yojoakak

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Re: Capital Gains on Folio Purchasing
« Reply #8 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?)

New Jersey Guy

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Re: Capital Gains on Folio Purchasing
« Reply #9 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.

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thezfunk

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Re: Capital Gains on Folio Purchasing
« Reply #10 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.

Bohb Daishi

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Re: Capital Gains on Folio Purchasing
« Reply #11 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.
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New Jersey Guy

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Re: Capital Gains on Folio Purchasing
« Reply #12 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.
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dontvote

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Re: Capital Gains on Folio Purchasing
« Reply #13 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.
dontvote

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lcdude

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Re: Capital Gains on Folio Purchasing
« Reply #14 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.