I just did my tax returns for my prosper loans and here’s how I did it. It has been very difficult, nay, impossible to find complete instructions online other than the in principle complete but to me useless suggestion to “consult a tax professional”(*). It does not make a lot of sense to me to spend hundreds of dollars hiring an accountant just to file returns for a few hundred bucks in defaults, bankruptcies, and income.

(*) If no one declared bankruptcy on you, Rateladder wrote an illustrated post on how to deal with prosper debt sales, income and expenses.

Fortunately I have plenty of time to minimize the damage from thieving lowlifes, who steal my money, so I read through many an IRS publication and instruction to find out exactly (subject to interpretation) how to deal with my prosper losses (presumably this will work for other peer to peer lending losses as well).

It’s better to give than to lend and it costs about the same.

–Philip Gibbs.

Of course I am not a tax professional, nor am I responsible for your taxes, and nor should you just do what I did without reaching your own conclusions (hint read the IRS booklets). One of the main reasons that I do my own taxes is to demonstrate good faith in case of an audit which I think entails reading and interpreting IRS instructions and trying to follow them to the best of my amateurish ability. I’m not sure whether one demonstrates good faith by following instructions from random blogs on the internet though.

Here’s what I did

1. First I logged into Prosper. Then I went into Your Account -> Statements and downloaded the Consolidated Form 1099, Year 2007 and the Lender End-of-Year Statement, Year 2007.
2. I’m doing a 1040 joint return and since I am not a home owner or otherwise weighed down by heavy obligations, I am NOT itemizing my deductions. This means no schedule A for me and so I can’t deduct service fees and collection fees (see the Lender Statement). I do need schedule B because of my substantial interest and dividend income as the IRS wants details once certain limits are exceeded. I also need schedule D for my capital gains and losses. The easiest way to get these is simply to google them e.g. “irs 1040 schedule d”. Get the form (f1040sd.pdf) and the instructions (i1040sd.pdf). If google did its thing they should be in the top 3. Since I have a lot of gains and losses to report, I am also getting schedule D-1.
3. 1099-INT Box 1 went on schedule B line 1. I simply put “Prosper” and the amount.
4. From the Lender Statement, I also received some Late fee payments. I entered those on form 1040 line 21 (other income) putting “Prosper Late fee payments rec.”. I’m not in the P2P referral business, but I think income from this activity would go here as well.
5. Dealing with debt sales or repurchases (in case of identity theft or fraud, prosper repurchases the loan from you and takes the hit) is as easy or difficult as dealing with stocks. I’m used to dealing with stocks, so this is easy. First I made a draft just like schedule D with 6 columns: Description(a), Date Acquired(b), Date Sold(c), Sales Price(d), Cost(e), Gain or (Loss)(f). Then I got the lender statement and flipped back to the last pages where I find “Loans Repurchased by Prosper” and “Loans Sold to Debt Buyer”. For the Description I use “Prosper Debt Sale XXXX” or “Prosper Repurchase XXXX”, where XXXX is the number of the loan. Then I put the Purchase Date, the Sale Date, the Pre-sale principal balance, and then the Proceeds from sale to debt buyer rounding the numbers to cents. In the last column I subtract the latter two numbers to get my loss which I enter in parentheses to indicate a negative.
6. Dealing with bankruptcies is trickier. Go to the IRS website and get Publication 550, 2007. Go to page 53. It is my interpretation that a prosper bankruptcy is a nonbusiness bad debt and that all nonbusiness bad debt are claimed on schedule D line 1 (or the corresponding line on schedule D-1) as short term losses regardless of whether the loans were held for more than a year. Now the bankruptcies are not filled out as the capital losses above. Go to page 54 and read the center of the page on “How to report bad debts”. Here I entered (on two lines) schedule D line 1 column (a) “Prosper Bankruptcy XXXX Statement Attached” and then the loss (=Pre-sale principal balance) in column (f). Now as I understand publication 550 I need to attach one statement for each bankruptcy! This statement should explain a description of the debt including the amount, the name of the debtor, the date it became due, any family relations to the debtor (thankfully I don’t have any!), the efforts made to collect the debt, and why I decided the debt is worthless. So I logged onto prosper and went to my account > lending > loan detail for each of the bankrupted loans and printed that out. I also printed out the promissory note. These will serve as documentation and I plan to include a copy of them with my return. Then I made a generic statement.

Attached Statement to Schedule D – My Name and SSN like on the schedules.

Prosper Bankruptcy for loan #____

The debt is a peer-to-peer loan (see attached promissory note for details) where Prosper Marketplace, Inc. (prosper.com) acts as an agent between the lender and the borrower.

Consequently I do not know the name of the debtor, but Prosper does. Also I do not have any family relations to the debtor.

Please see attached Loan Detail for a detailed description of the debt.

The original loan was $_____ and the remaining principal is $_____

The remaining principal became due when the borrower declared bankruptcy (see promissory note) and Prosper removed the loan from my lending portfoliowhich occurred on __ / __ / __

Prosper employs a collection agency (see Loan Detail) which has suspended collection activity due to bankruptcy filing by the borrower.

Since the debt is not collateralized I do not expect to receive anything from the bankruptcy proceeds. I therefore deem this debt worthless.

Date and Signature

This concludes the prosper portion of my taxes.Now if you’ll excuse me while I go out in the bathroom and cry…

Originally posted 2008-03-14 07:02:43.