Peer-to-peer lending and taxes: What to know
Are all your high returns from P2P lending going to be taxed to death? Peer to peer lending and taxes are more nuanced than you might think. P2P profits are one of the few investments subject to income tax rather than capital gains tax. This stands in stark contrast to stocks.
Do you pay tax on peer to peer lending?
Let’s get straight to the burning questions: do you pay tax on peer to peer lending and how exactly is peer to peer lending taxed in comparison to your normal return?
First off, yes, it’s definitely taxable.
There’s no need to panic though as the taxation terms on P2P loans are actually pretty reasonable. The interest you receive through loans is taxable just like any other form of income.
If you lend a borrower $10,000 then get a 9% return, then you’ll only be taxed on only your $900 gain rather than a full $10,900. However, the $10,000 will still be taxable if it’s part of your income earned during the current tax year.
Furthermore, there’s no specific tax rate for your P2P earnings. Instead, the profit is just added to your total income. It’ll then be included in your income tax based on which bracket and rate you’re in — simplifying the process further.
How does the government see P2P loans?
The United States government looks at the current loans in your portfolio the same way it’d see more conventional securities like bonds — from a tax perspective anyway.
While outstanding loans that are waiting on repayment are seen as assets, the interest you’ve received is classed as income.
Of course, there are some differences if you’re paying taxes to a territory outside the US. In fact, lenders in the United Kingdom can even get around tax liability altogether with IFISAs. An Innovative Finance ISA essentially lets you make P2P lending investments without tax liability.
Check your local guidelines to see if there are any tax breaks in your country.
When reporting your income, you can file the tax return through conventional mail or take the digital option. Electronic filing is generally encouraged by the IRS since it gets processed faster and doesn’t put an excessive burden on their staff.
Is doing taxes for peer to peer lending a hassle?
It shouldn’t take longer than an hour to calculate your P2P tax liability — and you’ll get faster at it with practice. The equation below should help you out too!
Total interest earned + late fee income — losses from defaults — service fees — interest declared on 1099s = unreported taxable income.
The interest that you earn as a result of P2P lending needs to be mentioned when you file your tax returns as “income from other sources.” Mislabeling the income could get you in a sticky situation so be sure to tread carefully.
As mentioned earlier, the taxable profit must be paid in accordance with the bracket that the lender would normally fall under. It’s NOT possible to classify your P2P ROI as capital gains or loss — barring any legislative amendments in the future. This is a shame since capital gains are generally taxed at lower rates than standard income.
You just have to measure your ROI then deduct any other costs you incurred in the process. Managing both your peer to peer lending and taxes isn’t rocket science. You just need to keep things organized.
Lend with a P2P platform that helps make tax season easy
At MyConstant, we know peer to peer lending is taxable and we want to help you earn the right way. We provide an IRS 1099-INT filled out for all customers and our staff are available to help you out 24/7.
Sign-ups are free and you can start investing with any amount. Come see how you can do more with your money today.