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.