6

If I make a $1000 investment in peer-to-peer lending, then are the repayments simply taxed as interest payments, similarly to interest earned in a savings account, or is there a reflection of the cost basis like you have when investing in stocks or ETFs?

For example, if I were to invest $1000 in a stock then sell it within the same year for $1200, I would only pay capital gains taxes on the $200 profit. If the loan repayments for a single year total $400 (assuming a 3-year loan that would repay $1200 overall with equal payments), do I pay taxes on all $400 or is there an adjusted cost basis of $333 (or something) so I'd only pay taxes on $67 of the original $400 repayment?

7

You should receive tax forms such as 1099-OID (for interest) and 1099-B (for charge-offs). Apparently, in contrast to traditional bonds with "coupon" interest payments reported on 1099-INT and principal returned at maturity, many peer-to-peer loans are structured as debt that you purchase at a discount. In your example, you bought $1200 of debt for $1000. The difference would be considered income in the form of an "original issue discount" of $200, and would be amortized over the loan term.

  • I see, so taxes are only due on the discount, not the entire repayment. Out of curiosity, do you know if there is an IRS publication covering this? I haven't seen one, but I might have the wrong search terms. The link you provided is very helpful! – Hari Ganti Jun 10 '18 at 23:40
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    @HariGanti There is a section of Pub 550 on original issue discount. – nanoman Jun 10 '18 at 23:47
  • It seems OID might not apply because of exception 5. Am I wrong in how I'm reading it? – Hari Ganti Jun 11 '18 at 4:03
  • @HariGanti That's beyond my knowledge. I suspect it may matter that the loans are handled through an intermediary organization rather than directly between individuals. – nanoman Jun 11 '18 at 4:45
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    @Hari, those exceptions are relevant in the case where no interest payments are made on the loan for over a year. In the example given in your question, regular payments are being made, so the interest income is taxed as it is received. – prl Jun 11 '18 at 16:16

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