cmonkey's journal

[jacob]

@spoonman - I can answer that!

If you have no defaults then it's a simple and single line on schedule B (interest income). If it's small enough, you can even keep it on your 1040. That's totally manageable.

However, if you do have defaults, then FOR EACH AND EVERY DEFAULT, you need to do this ("need" as if you want to deduct your losses---if you don't care, I guess you can just ignore it. The IRS doesn't seem to mind you taking less deductions than you could):

http://earlyretirementextreme.com/prosp ... tices.html

During my Prosper years, my tax returns were eventually 50 pages deep due to addendums and statements---one for each default. Never again! ... Yes, I was filing quarter-pounder tax returns which is why I'm not overly keen on P2P anymore.

Of course I never figured out how to have zero defaults.---Something which everybody LC lender seems to have figured out?! Then again, I was P2P lending during 2008=2010 ... not the best time to be handing out unsecured money to consumers who for some reason didn't get approved by ordinary credit/banking institutions. Rising/falling tide? I don't know/care to speculate.

However, from a tax filing perspective, lending money to deadbeat corporations is much easier than lending it to deadbeat consumers.

[spoonman]

@jacob: Thank you for the thorough response, I really appreciate it. Filing thick returns is exactly what I'm afraid of. I suppose one can limit this sort of headache by only lending to the highest rated (by the platform's standards) borrowers, but then I imagine that would seriously hamstring returns.

[cmonkey]

Lending Club as drastically reduced the amount of work for P2P lending. For most investors they issue a single 1099-OID form. I simply plug in the number (I use TurboTax) and I'm good (as far I know from what I've read). Regarding deductions, I won't have enough income for those to make a difference (after standard deductions and child deductions) so I doubt if I'll bother with it.

But it looks like it might have simplified as well.

Source

Gains and losses from recoveries, sales, or charge offs related to Lending Club Notes are generally reported for tax purposes as capital gains or losses, rather than ordinary gains or losses. Notes are generally considered capital assets because they are owned for the purposes of investment (similar to a stock or a bond). Generally, realized capital losses are first offset against realized capital gains. For individuals, any excess capital losses can generally be deducted against ordinary income up to $3,000 ($1,500 if married filing separately). Losses in excess of this limit may generally be carried forward to later years to reduce capital gains or ordinary income until the balance of these capital losses is fully utilized.

It looks like you file a form 8949 and 1099-B and report the total losses on that.

For you stock investment veterans, do you itemize for market capital gains/losses? If so, then you itemize for charge-offs.

Maybe Dragline could comment on charge off tax information?

[cmonkey]

Do you think Lending Club takes legal action to recover unpaid debts on behalf of the lenders?

They are pretty aggressive for most of my late loans and charge offs. They log quite a lot of info about their activities.

Once a loan goes past a certain stage they pass it to an 'advanced collector'. Sounds ominous.

Example - this one is highly suspicious since they made 2 payments, then decided they wanted to mail their payments, yet haven't made any yet. Oh well.

[jacob]

@cmonkey- The charge-offs happen on Schedule-D. This happens AFTER the collector gives up on them. Each line/default requires a separate statement (1-2 pages of signed paperwork saying that "you don't know these guys"---business bad loans don't work for "family"). That's what makes the "total package" weigh so much. I just printed a statement for each default (about 10/year in my case, starting 2-3 years into the loan) and signed it. Note, this was during the early years of P2P. Maybe they've straightened things out since then.

[cmonkey]

Ah, that sucks. Glad it won't really matter if I report them or not since my income will be low enough. The only spot it would help would be the end of my working years.

Do you have to do that for stock market losses as well?

[jacob]

Well, technically ... yes!

I think in most cases you'd WANT to do it, because it's free money [for you]. Would you rather pay extra to the IRS?

Understanding how taxation works generally provides more ROI than any kind of investment acumen can.

[cmonkey]

Well would capital loss deductions be filed in addition to the standard deduction? I was under the impression that you could either itemize deductions or file the standard deduction, whichever is higher? You can't itemize AND take the standard.

Since LC losses are capped at $3,000 I would need to come up with $9,000+ additional deductions to benefit from itemizing the charge offs (for married filing jointly that is!). Since I don't contribute to retirement accounts and have no high interest mortgage payments, I have nothing.

[Dragline]

It looks like you file a form 8949 and 1099-B and report the total losses on that.

For you stock investment veterans, do you itemize for market capital gains/losses? If so, then you itemize for charge-offs.

Maybe Dragline could comment on charge off tax information?

Charge offs go on a Form 8949 that gets attached to a Schedule D if you are itemizing -- its a capital loss, but could be short or long-term depending on when it goes bad. You can use these to offset capital gains on other asset sales.

If there are recoveries on charged off loans later, they will be reported as income on a 1099-B in the year the recovery is made. There will be a 1099-B for any trades you make, too.

It is much easier than it used to be, because the forms produced by LC are now quite clear.

I have never had to file any statement or declaration as jacob suggests in the blog post link. I have been advised by a professional accountant/tax preparer on how to report this.

[cmonkey]

I have never had to file any statement or declaration as jacob suggests in the blog post link. I have been advised by a professional accountant/tax preparer on how to report this.

Thanks Dragline. I'm guessing the submitted statements could possibly offset an audit, but in any event, simply keeping your statements (and not submitting them) as proof should be good enough at this point. There are many more LC investors now so audits are probably minimized.

Of course this is assuming you have enough itemized deductions to even bother with it.

[cmonkey]

@cmonkey--I have to bring something to a party on Sunday and I'd love to try something like that. Any chance you could share the instructions or point me toward them on the interwebs??

Sure we'd be happy to share. The DW did it all, but I will do my best to summarize how she did it.

The loaves of bread were made using this recipe from our old 1961 Betty Crocker's New Picture Cookbook.

Sweet Roll Dough

1/4 cup warm water (not hot - 110 to 115 F)
1 pkg. active dry yeast
3/4 cup lukewarm milk
1/4 cup sugar
1 tsp salt
1 egg
1/4 cup soft shortening
3 1/2 to 3 3/4 cup flour

In bowl, dissolve yeast in water. Measure flour by dip-level-pour method or by sifting. Add milk, sugar, salt, egg, shortening and half of flour to yeast. Mix with spoon until smooth. Add enough remaining flour to handle easily. Turn onto lightly floured board ; knead until smooth (5 min). Round up in greased bowl, bring greased side up. Cover with cloth. Let rise in warm place (85F) until double, about 1 1/2 hour. (If kitchen is cool, place on a rack in the oven over a bowl of hot water and cover with a towl). Punch down ; let rise until almost double, about 30 min.

To make the bread in the shape of a cake she used two 9 inch round cake pans. She also suggested placing a circle of wax paper in the bottom of the cake pan and greased both sides of the wax paper so the bread won't stick (much like baking a regular cake). Divide the dough in two, shape them in a ball, and then gently form into a disk that will fit the pans. Place them into the pans and press down so the dough meets the side of the pan Let it rise for 30-40 minutes in a warm place and bake at 400 degrees until golden brown (and 'tap test' gives a hollow thunk).

Once baked, take bread rounds out of the pans and let them cool on a rack. Once cool, cut each round in half, similar to as you would when making a layered cake.

The filling is your preference. Options are, but not limited to, chicken salad, ham salad, cucumber and cream cheese, other fresh veggies, cold cuts, cheese, basically anything you might have on an 'old fashioned' picnic. The DW used chicken salad and cucumber and cream cheese for her layers.

The 'frosting' is cream cheese. Use one block regular and one block neufchatel cream cheese. These need to be set out until they reach room temperature and then microwaved for three 15 second intervals to get a more loose consistency. Then whip the cream cheese mixture with a mixing machine using the whisk or paddle attachment. Spread 'frosting' on as you would be icing a cake or decorate using piping tools.

All of the garnishes are edible flowers - orange on top is Calendula, the blue/pink around the side are Bachelors Button, and small white/cream flowers are arugula blooms. The smaller blue on top are Borage flowers and the springs around them are fennel. The grass-lookng plants are chives, the large green leaves are sage and the dark green frilly leaves at the base are Scarlet Kale leaves.

For more ideas, look up edible flowers, use vegetables, or use your favorite herbs!

[thrifty++]

Of course I never figured out how to have zero defaults.---Something which everybody LC lender seems to have figured out?! Then again, I was P2P lending during 2008=2010 ... not the best time to be handing out unsecured money to consumers who for some reason didn't get approved by ordinary credit/banking institutions. Rising/falling tide? I don't know/care to speculate.

@Jacob - did you still end up making a return on investment during 2008 and 2009 from Lending Club? So many things seem to be aligning to suggest we are on the cusp of a recession. In NZ and Australia at least anyways.

[JL13]

Well would capital loss deductions be filed in addition to the standard deduction? I was under the impression that you could either itemize deductions or file the standard deduction, whichever is higher? You can't itemize AND take the standard.

Short answer: You know just enough about taxation to be dangerous! You would definitely benefit, tremendously, from additional study.

Long(er) answer: Standard deduction vs itemized deduction covers only "below the line" (AKA "from A.G.I.") deductions: Medical expenses, state taxes, mortgage insurance, charitable deductions, job expenses. They happen on page 2 of the 1040

Capital gain losses are "above the line" (AKA "for A.G.I.") Deductions. They happen on page 1 of the 1040 and are unrelated to itemized deductions.

Again, pull a few years of your 1040 and read through them line by line. Find where capital losses go. Find where interest income goes. Get to know the entire form. It will allow you to plan!

Don't just outsource to a CPA, they'll charge extra for planning versus preparation. And their advice might be wrong(wrong application of the law or wrong application for you). If you really know the forms, you can see things that interrelate and can combine plans/techniques to save even more. A CPA may not do that.

[cmonkey]

You would definitely benefit, tremendously, from additional study

...
Capital gain losses are "above the line" (AKA "for A.G.I.") Deductions. They happen on page 1 of the 1040 and are unrelated to itemized deductions.

Interesting! I have never had to deal with capital losses so its good to know this ahead of time. I will certainly post about taxes when I get to that point.

[jacob]

@thrifty++ - This was back in the wild days of Prosper. Not Lending Club. Ultimately I barely broke even.

[cmonkey]

@thrify, part of the recession-proofing strategy that LC investors make is to lend to higher income borrowers that are used to making debt payments already. I mentioned a while back that credit card defaults and late payments only rose to 7 or 8 percent in the US during 2008-2009. Ultimately I think most consumers are scared to death of hurting their credit rating and will do what it takes to pay their debts even during crisis.

[jennypenny]

Thanks cmonkey! I'm using a gluten free bread made from a mix. The rest will be similar to yours. I'm doing a chicken salad as the main layer and adding grapes, apples, and walnuts for a waldorf salad theme. I have to use TempTee cream cheese since it's GF. I don't have any good looking edible flowers right now (too hot and dry) so I'm decorating with grapes and apples fashioned into flowers.

[thrifty++]

thanks Jacob and cmonkey. Hopefully Harmoney is following Lending Club's settled model.

[cmonkey]

I wanted to add to my comments that with our projected source of income, just standard deductions and exemptions will bring us to a level where we owe zero federal taxes (not sure on state).

Using this calculator you can see what certain income sources/levels will do to your tax bill. You can see from the pic that having 14K in interest (which is what OID income counts as) and 6K from dividends gives a tax bill of zero (these levels are my projected FI level sources). So I wouldn't even bother with LC charge offs at that point. In fact if I bring the interest number up to 20K it still stays at zero.

Adding in children brings it up even more. I can plug in up to 48K in interest income (and 2 children) and it stays at zero due to the exemptions and credits from the children.



As jacob stated, understanding tax code can provide the best ROI.

[cmonkey]

Chickens, Possibility Spaces and a Mid-Month Update

Chickens

So we have made our final decision regarding which roosters we are keeping and have gone ahead with the processing of the others. We made the decision based on who was best for our hens, particularly in regard to mating behavior. We chose Stanley, our true blue rooster. He is a great rooster, always watching out for threats, calling in the hens when treats are around and not picking on any single hen. In fact, he was actively protecting the hens from the other roosters when they were getting aggressive.

He has grown quite a bit and is now a truly handsome bird.



We are also getting 1 egg per day now and so we are super thrilled at that. Its the same little green egg from the same hen each day. Waiting on the others!

Possibility Spaces

I really like the term that spoonman came up with when he talked about 'possibility spaces', or certain levels of income/net worth that would allow for certain lifestyles and locales. I decided to figure out our total net worth (accounts, house, truck) using Mint and have discovered a quite delightful surprise. Part of my "possibility space" of investments was going with Lending Club 100% (when I first started). Clearly this is a risky space so I have evolved and modified my plan to include dividend growth, as well as running the numbers for various levels of income.

Lending Club 100% is at the very bottom of that possibility space, and guess what? With our total net worth, we just crossed into that space 2 months ago. So "technically" we could sell the house and put all our cash and investments into LC and be set up with $1300/month. Don't worry, we're not going to do it. It just feels amazing knowing we are in that possibility space now!

We have in fact pondered building a tiny home, buying some junk land, parking ourselves on it and building a homestead. We could actually do it now if we wanted to. However, we have priorities other than "I hate work want to quit". Who knows though, this knowledge may just change our plans a bit. Ironically enough, I discovered this on the same day I'm being forced to work (by upper management) on a Friday night. I don't feel so bad now.


Mid-Month Update

Financially speaking August is turning into our best month of the year so far. Half way through and we have spent under $900 total, including all our static bills (taxes, internet, etc..). The next week will be quiet and if I can control our funds during the last week of August (when my in-laws are in town) we will finish the month in the realm of 78-80% savings. Wish us luck.