Where to write off Prosper Loans that have been charged off

"Fearless" wrote

Try looking at Schedule D - loans made by someone not in the business of making loans is a capital transaction. You have in essence a capital loss when the loan becomes uncollectible.

As always, documentation is a big deal here, as is your attempt to collect.

OK. I see that Schedule D has a spot for this and I can work the numbers pretty easily. One additional question. Since each individual loan started out as a transaction of $50, which became uncollectible at some point mostly in the $40 range, is it preferable to list each loan separately or should I just lump all 15 of the loans into a single bundle and totally up the losses? About half the loans were more than a year old before Prosper charged them off, but the other half were less than a year old. I'm already at the AMT threshhold and have discovered that it doesn't make a whole lot of difference to distinguish between long-term and short-term losses. I'm already over the $3000 loss limit without even visiting the Prosper loans and the question to me is whether it is worth the effort to do 15 worksheets instead of 1. Documentation of all this is trivial since I have all the Prosper documentation of their efforts to collect the loan and the report from the collection agency. The lendees' are anonymous except for information about their credit that determined whether the loan was worth the original risk. Only Prosper and the Collection Agency has the individual information.

So, to summarize, individual loan documentation or bundled?

"Fearless" wrote

Stop right there. Do you have documentation that was signed and dated ~at~that~time~ that supports each $50 "loan"? This is what the IRS would be asking for to document that a loan existed in the first place.

If a friend of mine came up and asked to borrow $50, after I got through laughing at them, I'd probalby hand him (or her) some cash without any written documentation made. If that friend didn't repay me, I'd not be able to take a deduction as a loss on the "loan" because I couldn't prove a loan existed.

If the loans were to different people, keep them separate. If they were multiple loans to the same individual, and you determined they all are bad at the same time, then maybe lump them together but accounting for any that are less than one year / short term loans gone bad.

Prosper is all on line. That $50 was a piece of a larger loan, likely $500-$2000, sometimes more. From what I've seen of the system, it would at least provide a decent trail of details that the IRS should readily accept. Although, I don't believe there are any signatures involved, again, this is all on line. Joe

Prosper is an online microlender, currently seeking a different status than its current form, presumably with the FDIC. A lender is fully vetted, as are borrowers, and a lender can choose to lend a large amount or a small amount, usually $50, as part of a pool of money to be loaned to someone with a particular borrowing need. Prosper handles all of the paperwork, tracks and collects the loan payments, and determines when and if to turn over to the collection agency and when to write off a loan as uncollectible. The borrower's name is held by Prosper, as is the lender's name. We simply identify our loans by numbers on our monthly statement. It tells us the status of each loan, and when these particular loans were written off we received an email so informing us. We receive a consolidated statement at the end of the year reporting all interest earned, the status of each outstanding loan, and a separate listing of each loan that was written off. There would be no way to track the individual loans beyond what Prosper reports. Thus, the evidence to document the loan status is available only on the Prosper statements and end of year tax documentation. I made a considerable amount of money from Prosper, all duly reported on a 1099-INT form, which is why I'd like to write off the actual losses as well.

I hope this is sufficient to explain the "audit trail" on bad debt.

I also have some loans on Prosper that have reached a charge off status. In actuallity this can mean one of four things. According to the Prosper website

they are: * In collections: The loan is still actively being collected by a Prosper-designated post-charge-off collection agency. * Sold to debt buyer: The loan has been sold to a debt buyer. Proceeds of sale (if any) are credited to lenders on the loan. * Paid in full: Although the loan was charged-off, the borrower has met the loan obligation by paying it in full. * No value: If a loan cannot be collected any further, and cannot be sold to a debt buyer, it will be charged-off completely, with the loan balance reduced to $0.00.

It seems that you can only write them off on your taxes if the status shows as one of the last three. Mine still remain in an "in collections" status. One debt that was charged off is a year old, but still remains "in collections," so I do not believe that I can yet consider this a capital loss.

Does any one know for certain? I haven't tried contacting Prosper, but they may say they can't offer tax advice.