What are the tax implications of a LendingClub loan writeoff?
I've invested some small amount of money in LendingClub notes. I wrote about it in my blog, if anyone is interested. Overall it seems to be working great, I spread my investment over a broad variety of loans with various ratings, and have (in theory) a pretty nice >10% ROI.
However, one of the debtors defaulted on his loan, in which I had interest. The loan has been charged off by LendingClub. My current portion of the principle is ~.
Now, the amount is small, but the question still stands: how does it affect me, especially tax-wise? Can I deduct these 22 dollars on my taxes this year as a short-term loss? (note was issued in march this year) What if it gets collected in a year from now and I get some or all the money?
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Once a note has been fully charged off, not just late or in collection, it's remaining principal can be deducted as a loss. You'll still be taxed on the OID interest you received from the loan before the loss. Also, any loans sold on the secondary market they offer for a loss, you can deduct the loss amount.
If there is any recovery in a later year, which is possible even in charge off as the debt has likely been sold to collections agencies with a return % provision sometimes (not sure of lending club's specific provisions, so you might want to ask), then you'd have to file an amended return to adjust for the recovered amount and pay the taxes owed as a result of the change in your total itemized deductions.
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