Prosper Lending, you’re the one
You make tax-time lots of fun…
This past Friday, I was having lunch with the author of the RateLadder peer-to-peer lending blog and the talk got on taxes. (What? You don’t talk about taxes at lunch with your friends? How strange!) We discussed taxes due to our side business until Kevin off-handedly mentioned Prosper taxes. Being as Lazy as I am, I haven’t looked at my taxes in great detail yet. I hadn’t thought about taxes from my Prosper earnings.
Dealing with Prosper taxes can be described in one word – pain. I pity the fool who must go through this process. As RateLadder started to explain it to me, I said something like, “Whoa, whoa, whoa… there’s no way I can remember this with a face full of BBQ sauce… write this up in a blog post and send me a link.” Less than 24 hours later, I found a link in my e-mail in-box… check out this quick run-down of Prosper taxes. Now RateLadder is not a tax-professional, so check with your own expert.
When I read that run-down, I was ready a frontal-lobotomy. Prosper, I realize that taxes are out of your control. Please realize that this is a huge risk to your business. One of the first rules of business should be, “Do not cause your customers harm.” I feel harmed. Can’t you give us with simplified forms?
Randall at CreditWithdrawal says
Just another barrier to entry. Banks don’t like competition, even from little P2P lenders, so the paperwork they and the government (naturally) evolve is just another barrier that newly established lenders have to get used to. Scares away the small fish.
Mrs. Micah says
Ugh. I’ll add that to my list. I’m sort-of keeping a tally of reasons I would and wouldn’t use Prosper. Making my taxes hectic is a definite downside.
her every cent counts says
Oh boy. This tax season sure is going to be fun. Yee haw!
I am a new prosper lender. I think next year will be a lot of fun. It kinda puts things in the perspective of whether joe shmo with $1000 can really play “bank” online or not..
Chief Family Officer says
Ugh, I am ready to venture into P2P lending but this is certainly a deterrent. Lazyman, do you know anything about the records that Lending Club provides?
Early Retirement Extreme says
I am very grateful for rateladder’s post. Thanks to that I’m very tempted to do my own taxes again this year. Sadly, I had over 200 prosper loans in 2007, so I foresee a few addendums to schedule-D. Luckily I will only have 140 loans over 2008, less than a 100 by 2009, and hopefully none by 2010. Indeed, this is certainly more pain than it’s worth. Especially for those using an accountant. I imagine that the extra paperwork can quickly kill any profits.
Not sure it’s a bank conspiracy. I did a lot of wheeling and dealing in options in 2007 and it was approximately the same mess. The problem is in the tax law and not in prosper per se, but no one is making this easy (the most helpful in terms of filling out tax returns are actually certain mutual funds).
Thus I’m really moving towards a KISS strategy for my finances.
Oh God, the 1040EZ folks must be so happy these days ;-P
While it is wrong to file a 1040 with intentional errors on it, the IRS isn’t going to put you in jail for an honest mistake. If you make any effort at all to account for your prosper interest when you file, the IRS will either accept it at face value, or, if Prosper has given the IRS enough numbers for them to calculate what you owe, the IRS will send you a bill for the correct amount. The interest rates are very reasonable, and if you’re within 20% of the correct total amount of tax you owe, there aren’t any penalties or anything.
I don’t do taxes professionally and can’t be held liable, blah blah blah, but I’ve filed my taxes incorrectly 3 times in the last 8 years, and I’ve never had any trouble correcting honest mistakes. Only one of the three times did the IRS send a bill for more than what I now believe was the correct amount, and that’s just because they didn’t have the cost basis for some capital gains stuff, which is easy to correct.
Early Retirement Extreme says
Correction: The option fun was on the 2006 return, not ’07.
@plexluthor – that is comforting to know. I am now slightly less paranoid ;-)
That’s why I only invested in the highest-quality loans at Prosper. No defaults means no loan sales to account for.
Reading that post made me never want to venture into peer to peer lending. taxes already make my head hurt.
Early Retirement Extreme says
@rstine – prepare to be surprised ;-) .. even AA’s go down.
Although I didn’t dive into the nitty gritty, a lot of it seems like six of one, half a dozen of the other. Even if you stuck the money in a bank, you would still be getting a 1099. Of course, some of that other stuff is a bit messy. IF the spread of returns are there, then probably worth the trouble.
I started panicking when I added my prosper interest to Turbotax. My refund PLUMMETED. But then I realized I also had to add the losses from a couple of defaulted loans. BOOM, right back up again. I’m certainly going to re-think this whole Prosper thing and might quit reinvesting my loan payments (if I’m going to pay taxes on $1000+ in interest earnings, I’d like to at least get my hands on that money!). However I’ll most probably have a few more defaults this year, so at least that loss offsets my tax liability.
PS I had this same experience two years in a row with my individual stock trades. Not only is it a HUGE pain to put them all in one by one and find the cost basis, but the taxes pretty much KILL any return you made. That’s when I stopped trading stocks (at least more than a few times a year).
Learning lessons, slowly but surely.
1. ‘Twas a bit of a pain, and Prosper could have *easily* done this calculation for me.
2. I don’t think one needs to itemize each sold loan; just like you can put “various” in the purch date for stock – I just totalled up the outstanding principal and sales proceeds for short-term, and the same for long term.
3. I wouldn’t leave this burden on the IRS – it’s a capital loss that you get credit for – would you leave it to the IRS to tell you that? Not even sure if they’re legally obligated to notify you that you didn’t claim everything you could.
Ben - BankAim says
Just seems like a huge headache to me! Our CPA has to deal with those ;)