lending club-ordinary income?

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hoping2retire35
Posts: 4
Joined: Tue Jan 08, 2019 12:50 pm

lending club-ordinary income?

Post by hoping2retire35 » Wed Jan 30, 2019 12:36 pm

So my understanding is lending club profits are considered ordinary income.
https://investorjunkie.com/peer-to-peer ... ub-review/
It is also my understanding that ordinary income is the same thing as earned income(never cared to look this up before)...
https://www.incfile.com/blog/post/ordin ... ed-income/
So...
this means doing a couple hours of work per month(at most) with lending club and this is considered earned income; subject to FICA taxes and eligible for IRA contributions?

Do I have this correct?

jacob
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Re: lending club-ordinary income?

Post by jacob » Wed Jan 30, 2019 1:13 pm

No ... earned income (from work) is a kind of ordinary income as is interest income. However, interest income is not earned income. Even if you log into the LC website and spend hours fiddling with it or analyzing loans, it is not considered work and therefore it is not earned income (unless you're a professional investor in which case it is much more complicated). If it is not earned income, it is not subject to SS or FICA taxes and also not eligible for IRA, etc. contributions. What is non-ordinary income you might ask? Things like capital gains. Similarly, capital losses (like defaulted loans) are not affected by your ordinary income deductions. You can only offset those with capital gains or carry them forward.

I would highly recommend trying to do your taxes with form 1040 using a pencil while reading the (very good) 1040 instructions.
Then it will all become clear. It is time extremely well spent as the understanding will also make you capable of tax planning which most likely has a much higher ROI than anything (alpha) you can do with investing.

hoping2retire35
Posts: 4
Joined: Tue Jan 08, 2019 12:50 pm

Re: lending club-ordinary income?

Post by hoping2retire35 » Wed Jan 30, 2019 3:16 pm

Thanks for the response. This is the phrase that threw me,

"It should be noted that Lending Club investments are not considered passive investments by the U.S. government. This means you cannot lock in the long-term capital gains tax rate. Therefore, the IRS taxes any profit as ordinary income."

seemed too good to be true and a little odd.

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