Author Topic: Not worth the returns after taxes.  (Read 23170 times)

bobeubanks

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Re: Not worth the returns after taxes.
« Reply #15 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.

bobeubanks

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Re: Not worth the returns after taxes.
« Reply #16 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.

standby

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Re: Not worth the returns after taxes.
« Reply #17 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.

jpildis

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Re: Not worth the returns after taxes.
« Reply #18 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.

daniel2023

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Re: Not worth the returns after taxes.
« Reply #19 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. 

mchu168

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Re: Not worth the returns after taxes.
« Reply #20 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.

bobeubanks

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Re: Not worth the returns after taxes.
« Reply #21 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?

mchu168

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Re: Not worth the returns after taxes.
« Reply #22 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...
« Last Edit: February 13, 2015, 07:19:27 PM by mchu168 »

rawraw

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Re: Not worth the returns after taxes.
« Reply #23 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.

mchu168

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Re: Not worth the returns after taxes.
« Reply #24 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.

BruiserB

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Not worth the returns after taxes.
« Reply #25 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.


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Fee

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Re: Not worth the returns after taxes.
« Reply #26 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.


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

bobeubanks

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Re: Not worth the returns after taxes.
« Reply #27 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.

Fee

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Re: Not worth the returns after taxes.
« Reply #28 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.

mchu168

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Re: Not worth the returns after taxes.
« Reply #29 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

« Last Edit: February 15, 2015, 10:43:05 PM by mchu168 »