LendingClub 1099 Forms and Tax Reporting Questions

If you’re a newer investor in Lending Club P2P notes, you may be wondering how to handle your investments at tax time. Will I get a 1099? Even if you do get a 1099, it might not cover all your loans. Unfortunately, the documentation provided by LC is often inadequate on its own. Here is what their website says you will receive in terms of tax documents;

1099-OID: If you invested in Lending Club Notes issued on or after October 14, 2008, you will receive an IRS Form 1099-OID if the following is true (measured for each Note):
If interest plus late fees less servicing fees is equal to or greater than $10, then the net result of this calculation will be reported as taxable interest on your 1099-OID.

Your year-end statement reports total interest and late fees so the amounts shown on your 1099-OID statement may be different if any of your Notes did not earn $10 or more of net interest (as calculated above) during the tax year.
1099-INT: If you invested in Lending Club member loans issued prior to October 14, 2008, you will receive an IRS Form 1099-INT if your total interest and late fees received during the tax year from all member loans issued prior to October 14, 2008 equals $10 or more.
1099-MISC: If you received other payments from Lending Club such as incentive payments, you will receive an IRS Form 1099-MISC if the total of such payments in the tax year equals or exceeds $600.
1099-B: If you sold notes on the FOLIOfn trading platform during the tax year, you will receive a Form 1099-B from FOLIOfn that shows your date of the sale, cost basis and proceeds, net of any trading fees charged by FOLIOfn.
1099-C: As a borrower, if you had a debt cancelled (charged-off), you will receive a Form 1099-C if the total charged off amount in the tax year equals or exceeds $600.

I did not receive a 1099 from Lending Club. Why not?
The key thing to note for the 1099-OID is that you must earn $10 or more of net interest per individual note. That means if all you invest in is $25 loans for diversification reasons, you will never receive a 1099-OID form that will help you file your taxes accurately. You could have a million notes of $25 each, totaling $25 million dollars and earning millions of dollars in interest a year, and you still wouldn’t get any guidance at all on your taxes. Even if you did get one, it probably only covers a certain percentage of your loans. If you ask customer service, you’ll get redirected a generic reply:

Do I pay taxes on my earnings from Lending Club? Interest and other payments received from your Lending Club Notes may be taxable. Lending Club does not provide tax advice and recommends that you consult your financial or tax advisor.

So helpful! :P By only providing the bare minimum required by law (which to be fair is what most companies do), LC leaves the individual investor on their own to deal with the rather complicated rules of recognizing interest payments and loan losses. For example, there is debate as to the reporting of interest based on when the payments were supposed to have been made, as opposed to when they were actually made in the case of late payments. The payment could have been due in late December, but the late payment arrived in early January. Can you imagine trying to track all this down for 1,000 loans of $25 each? You’d spend hours over a difference of maybe a few dollars.

The only real solution is to shift your investments into a tax-sheltered Lending Club Self-Directed IRA, which would remove any need to track this stuff and also reduce your tax bill. However, you’d be giving up the opportunity to invest on other alternatives. The IRA has no account fees if you start with a $5,000 minimum investment, otherwise there is a $100 annual fee.

The only real silver lining that I can see is that if LendingClub doesn’t file this 1099-OID form, then the IRS has nothing to compare with when looking for tiny discrepancies. Some people will see this lack of 1099 reporting as an opportunity to not report any interest income at all, but that is incorrect as all income must be reported even without a 1099 form. As far as I can see, all you can do is do your best to report all your taxable income. This is not tax advice! …just what I plan on doing.

I am going to take my 2011 annual year-end statement and simply use the numbers provided in the Earnings Summary section. I will report taxable income as the loan interest earned plus late fees minus charged-off losses, based on what the statement that LendingClub provides me says. Loans that are simply late do not count as losses until they are charged off. That’s it.

Comments

  1. Yeah… sounds like a mess

  2. Your method is exactly how I have done it in the past. I’ve read the debate on what is technically the correct method, but, at least in my mind, using your calculation is a good faith effort to pay the taxes that you owe and if you’re ever audited, good luck to the auditor trying to figure it out exactly (and likely be within a couple of bucks of what you paid any way).

  3. Thanks for this timely article. I did the same for my taxable Lending Club IRA. The year end statement is probably the best we can expect until Lending Club decides to (or is compelled by the IRS to) create some sort of more sophisticated documentation. As an aside, I’m continually amazed at how P2P lending is completely under the radar for mainstream financial institutiions. I met with our family financial advisor last week (a VP at Wells Fargo) and he has never heard of Lending Club. Ditto for our tax accountant who seem perplexed and suspicious when I explained Lending Club and showed him my year end statement. I’m happy that there are so many people in the dark, as I don’t think I could continue to expect 13.8% returns if everyone jumped on board.

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