So my take is the tax treatment is the same as a savings account or CD, but the capital losses are a bonus and improves taxes through the 3k deduction and offset against stock capital gains. Am I not looking at this the right way? What am I missing? I have not used LC platform yet but was considering doing so.
No. Capital losses are not a bonus. They are
losses.
So if you invest $1 in a loan, and the borrower pays as expected, you get your $1 back over time, plus you get interest.
But if you invest $1 and the borrower DOES NOT pay, then you do not interest, and you do not get your $1 back, ie it is confiscated, so you have a loss.
As a consolation prize, you get to report that loss on your tax returns, so that it may decrease your taxes. However, that loss may be either short-term or long-term depending on when the loan defaults. If it is short-term, then it reduces your taxes the same way that interest increases your taxes, however if it is long term, then it decreases your taxes by a lesser amount, ie at the long-term capital gains rate.
This different tax treatment of interest vs losses is often what people are complaining about.
So sometimes people might say, well I make 10%/year interest on that loan, and only 5%/year of my loans default, so hey I'm makin' the equivalent of a 5% return (before taxes).
Unfortunately after taxes you would do worse than a 5% note with no defaults, because of the different tax treatments.