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.