Author Topic: Lending Club tax question.  (Read 1546 times)

drewfromutah

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Lending Club tax question.
« on: January 18, 2014, 12:31:10 PM »
This is a really simple, dumb question, yet I can't find the answer anywhere. This is the first year where my taxes are going to actually be complicated (LC, other investments, a few different jobs) and I'm confused about the income tax I have to pay on LC interest.

I know LC won't send me a tax form because all my notes are $25 and I won't hit the $10 mark on any of them. So I'm planning on reporting it myself, but what if I am just re-investing 100% of the interest I have earned? Do I still need to pay income tax on it? Wouldn't this cause a bunch of confusion down the road and potentially cause me to have to pay income tax on it TWICE? I've got some people telling me I only need to pay income tax on what I withdraw from LC, and some people saying I need to pay it on any interest/fees I've earned.

Can someone clear up this newbie question for me?

Thanks!

Saverocity

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Re: Lending Club tax question.
« Reply #1 on: January 18, 2014, 01:10:42 PM »
Generally speaking an asset class/type of investment does not protect it from taxation, only an a tax preferred account does that.

There is no difference from a tax perspective if you have a $500 position that kicks off $25 in interest and you invest that back in, or if you take it out, or if you take it out and then put in $25 of clean money.

The money you reinvest avoids double taxation by increasing your basis. 

EG
You buy $500 of notes > your basis is $500
You earn $25 of interest > your basis remains $500, you pay tax on the interest earned.
You reinvest that $25 into the LC Note your basis is now $525
You sell for $525 you have no tax liability as your sale price is equal to your basis, and you have already paid the tax on the $25 interest earned.

« Last Edit: January 18, 2014, 01:13:03 PM by Saverocity »

Nords

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Re: Lending Club tax question.
« Reply #2 on: January 18, 2014, 09:15:42 PM »
The money you reinvest avoids double taxation by increasing your basis. 
I think the question Drew is concerned about is self-reporting his tax liability this year (with no 1099), and then next year getting a 1099 from LC which reports both this year's tax liability and next year's tax liability in the same year.

I'd rather not declare the income this year and pay taxes IAW the 1099 next year than try to explain to the IRS why my numbers are different from the LC 1099.