Saturday, April 12, 2008 Tax Treatment

Since has been featured a few times here, I wanted to share some insight into the Prosper tax treatment since it isn't prominently featured on the Prosper website and there tends to be some misinformation out there on the topic. One of the first things I question when I signed up was, "Do I have to pay taxes on Prosper? And how are the various Prosper income categories taxes?" Although I am not a CPA and I would recommend that you check with your own tax professional on this, I can share with you what I know and what guidance my tax accountant provided me with.

All the following entries that appear on the Prosper year end statement have tax implications. If you exceed $600, will send you a Form 1099. That does not mean you're off the hook if you've earned less than $600. You are still responsible for reporting and paying taxes on this income.

Interest payments received: This amount will be taxable interest income on 1099-INT.
Late fee payments received: This amount will be taxable income on 1099-MISC.
Service fees paid: This amount will be deducted from your taxable interest income.
Collection fees paid: This amount can be deducted from your Prosper taxable income.
Referral awards received: This amount will be taxable income on 1099-MISC.
If you have any loans repurchased or sold to buyers, you'll use 1099-B.

I was especially surprised to learn that referral fees are taxable. I figured it's like when you have a phone service or internet community account, whereby you refer friends and family and get to keep $25 or something. Anyway, apparently, this is the "bird dog" provision according to my seasoned accountant, in that a bird dog "points", so as the referring member, you point new members to the system and recognize the $25 as income for your referral.

Anyway, I hope this clarifies any misconceptions surrounding the tax treatment in the community.

1 comment:

telehunter said...

Good Info. What if you have some loan defaults? Can you deduct the loss of principal from the interest earnings on your good loans or are you limited to $3000 (or somesuch) for the loss part of the 1099 equation. In building a large diversified portfolio it is a given that you will have a fairly significant amount of loan defaults which are carried by the extra interest built into the rest of the loan portfolio.