Author Topic: Taxes - say goodbye to the small note exemption  (Read 11086 times)

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #15 on: January 28, 2013, 09:41:07 PM »
Just so I'm clear, we can't write off any losses due to defaults/charge off's from our Net as well correct?  That'd definitely bring down my net return.

No not true at all!  If you hold the notes in the ordinary course of your trade or business (this would be very few LC investors), then you can deduct your loss in the note (generally your adjusted basis, or what you paid for it plus OID included less payments received) as an ordinary loss.

The vast majority of LC investors will take a non-business bad debt deduction; non-business bad debts are treated as short-term capital losses.  Short-term capital losses are taken first against long-term capital gains, and then against ordinary income to the extent of the loss or $3,000, whichever is lesser.  If your losses exceed your capital gains by more than $3k, then you can carry forward the remainder into subsequent years.

So for most retail LC investors this isn't bad tax treatment at all.  Assuming you don't have a lot of capital gains, you can shield your ordinary income by up to $3k.  Not a lot, but it takes the sting off of a charge-off no!?  There's a tax policy argument there, since technically you would get a greater tax benefit from these losses as your marginal tax rate increases, but I'll leave that to the pros and just take my little deduction.

You'll get a 1099-B, which is the form that is used to report the amount realized on the sale or exchange of most financial instruments.  You get this form because, in the tax world, when a debt becomes worthless it is deemed sold on the date of worthlessness for $0.00.

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #16 on: January 28, 2013, 09:42:52 PM »
One last thing; and this is just a pain in the ass for people like me who used to file 1040EZs...to deduct a capital loss you need to file a Schedule D.  This means an end to free federal tax filing since most services I know of (e.g., HR Block) require you to upgrade to a higher level of software to claim the deduction.

It's the little things guys and gals...-_-

rajuabju

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Re: Taxes - say goodbye to the small note exemption
« Reply #17 on: January 30, 2013, 09:17:06 AM »
BOO to 1099's!

But I knew it wouldnt last forever like that

SarahV

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Re: Taxes - say goodbye to the small note exemption
« Reply #18 on: January 30, 2013, 10:48:41 AM »
One last thing; and this is just a pain in the ass for people like me who used to file 1040EZs...to deduct a capital loss you need to file a Schedule D.  This means an end to free federal tax filing since most services I know of (e.g., HR Block) require you to upgrade to a higher level of software to claim the deduction.

It's the little things guys and gals...-_-
You know you can fill out those forms yourself without paying for software... it's not that hard  ;)

It does annoy me that they don't have minimums to fill out forms like Schedule D, in the past I've had to fill out multiple pages of forms to pay $9 in tax.  ::)  I think we all would have been better off if I'd just skipped that one.

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #19 on: January 30, 2013, 10:50:40 AM »
One last thing; and this is just a pain in the ass for people like me who used to file 1040EZs...to deduct a capital loss you need to file a Schedule D.  This means an end to free federal tax filing since most services I know of (e.g., HR Block) require you to upgrade to a higher level of software to claim the deduction.

It's the little things guys and gals...-_-
You know you can fill out those forms yourself without paying for software... it's not that hard  ;)

It does annoy me that they don't have minimums to fill out forms like Schedule D, in the past I've had to fill out multiple pages of forms to pay $9 in tax.  ::)  I think we all would have been better off if I'd just skipped that one.

Sarah I'm a millennial; we don't fill things out by hand.

SarahV

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Re: Taxes - say goodbye to the small note exemption
« Reply #20 on: January 30, 2013, 11:21:31 AM »
Congratulations, so am I. And yet, I am still capable of doing my own taxes!

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #21 on: January 30, 2013, 11:26:16 AM »
You betray the generation!

SarahV

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Re: Taxes - say goodbye to the small note exemption
« Reply #22 on: January 30, 2013, 11:32:17 AM »
Being more competent than my peers is something I strive for daily...

brycemason

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Re: Taxes - say goodbye to the small note exemption
« Reply #23 on: January 30, 2013, 02:22:30 PM »
Will be interesting to see how big of a portfolio I can build before hitting the $3k per year in charge offs. I anticipate maybe $1500 next year. Perhaps will have to revisit the corporate shell idea so as to deduct all losses once I cross that threshold.

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #24 on: January 30, 2013, 03:19:20 PM »
Corporate shell idea?

yojoakak

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Re: Taxes - say goodbye to the small note exemption
« Reply #25 on: January 30, 2013, 03:22:55 PM »
One last thing; and this is just a pain in the ass for people like me who used to file 1040EZs...to deduct a capital loss you need to file a Schedule D.  This means an end to free federal tax filing since most services I know of (e.g., HR Block) require you to upgrade to a higher level of software to claim the deduction.

It's the little things guys and gals...-_-

Earlier you seemed to think filing the Form 8949 along with the Schedule D might not be necessary.

Have you had any time to think about whether or not that is really necessary?

http://www.irs.gov/pub/irs-pdf/f8949.pdf

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #26 on: January 30, 2013, 08:28:11 PM »
One last thing; and this is just a pain in the ass for people like me who used to file 1040EZs...to deduct a capital loss you need to file a Schedule D.  This means an end to free federal tax filing since most services I know of (e.g., HR Block) require you to upgrade to a higher level of software to claim the deduction.

It's the little things guys and gals...-_-

Earlier you seemed to think filing the Form 8949 along with the Schedule D might not be necessary.

Have you had any time to think about whether or not that is really necessary?

http://www.irs.gov/pub/irs-pdf/f8949.pdf

Ahh no I think I was wondering if it was necessary to print out all of your folio transactions, but after looking at the form they seem to want that information.  You'd always need to file the 8948.

I kind of want to hold off on any more tax discussion until I see exactly what Lending Club puts out.  I had a prosper account last year, not a Lending Club account, and so I still have yet to see what LC will give investors. (I also only had 2 charged-off notes so things were pretty simple).

One thing I will say about folio though is that your basis number will not be accurate for tax purposes.  If I remember correctly, folio only tracks what you paid for a note as your basis right?  That's not the correct number for tax purposes; your bad debt deduction will equal the adjusted basis subtracted from the amount realized.  Generally for debt instruments, your adjusted basis is equal to your cost basis (what you bought it for) + OID accrued - payments that you actually received.  I can't say for sure without doing a spreadsheet, but if you just report your cost basis, then you wouldn't recover the accrued interest that you were taxed on but never received in cash.

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #27 on: January 30, 2013, 08:30:38 PM »
Will be interesting to see how big of a portfolio I can build before hitting the $3k per year in charge offs. I anticipate maybe $1500 next year. Perhaps will have to revisit the corporate shell idea so as to deduct all losses once I cross that threshold.

Idk...just divide $3,000 by a predicted default percentage and that would give you how large of a portfolio you'd need.  E.g., let's say you expect 5% of your principal in notes to chargeoff.  $3,000 / .05 = $60,000.  Not precise, but that'd give you a rough idea.

AmCap

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Re: Taxes - say goodbye to the small note exemption
« Reply #28 on: January 31, 2013, 11:26:11 AM »
I think the substance of this thread has moved to a different thread now that 1099s are out.