HOW TO REPORT PROSPER INCOME AND LOSSES
ON YOUR FEDERAL TAX RETURNLegalese: The following information is provided for reference purposes only. Information was culled from various sources including but not limited to a trusted tax professional at a well known national agency. You should consult with a professional tax adviser for more specific instructions based on your individual circumstances. In particular, large note holders and self employed individuals may want to characterize some items differently or avoid shortcuts. Also see Prosper> Help> Investing> Taxes.
InterestInterest you received on Form 1099-INT is reported as ordinary interest on Schedule B as interest from Prosper. This is direct borrower interest you received on notes you purchased prior to 2009. If your total interest from all sources does not meet the Schedule B threshold, include Prosper interest with your bank and other interest on Form 1040 Line "Taxable interest."
OID InterestReport Form 1099-OID, Box 1 as interest income, same as above. This is indirect interest you received on derivative notes you purchased beginning in 2009. Since you do not receive interest directly from borrowers on the Borrower Payment Dependent derivatives Prosper began selling to you in 2009, your income from them is called an Original Issue Discount (OID). Your OID income is the sum that Prosper paid in like kind to you after deducting their service fees. In addition to your OID, the actual borrower interest and service fees charged you are shown on your Prosper Statement.
HINT: If you are reporting your interest on Schedule B and you have both -INT and -OID interest, the preferred method is to report them on separate lines such as "Prosper INT" and "Prosper OID."Late FeesAny late fee payments you received (Form 1099-MISC, Box 3) get reported directly on Form 1040 Line "Other income" and identified as from Prosper. This income is not subject to self-employment tax.
Lender Service Fees"Service fees paid" and listed on your Prosper Annual Statement can be deducted on Schedule A in the "Miscellaneous Expenses" section where one lists investment expenses, unreimbursed employee expenses, union dues, tax preparer fees, etc. This is subject to 2% AGI exclusion before being added to the rest of the itemized deductions (few lenders will be able to claim this).
Defaulted loansA defaulted loan is handled like the purchase and sale of any security. If Prosper sells a loan to a Junk Debt Buyer it also becomes a sale of a security. Report these events on Schedule D. Defaulted loans are long term or short term based on the holding period (if held for at least 366 days, it is long term). Your "Cost or other basis" is the amount of principal remaining unpaid to you. Refer to Prosper's Annual Statement or go to your note detail screen to find the number. "Net Proceeds" shown on Form 1099-B, Box 2 (usually zero) is your "Sales price" for the transaction.
HINT: Generally you can combine all items within each category, short term or long term, on a single line identified as Prosper Note Sales and simply keep the itemized detail on each note in your annual 'shoebox' of supporting documents. Report the "Date acquired" as "various" and use the most recent transaction as your date of sale. Either way, make it a habit to print your note detail screen for each note as you write it off and stash the copy in your file.Bankruptcy write-offsIf a loan becomes worthless and Prosper informs us the "sale/discharge" was the result of bankruptcy, it becomes a short-term capital loss, no matter the holding period, and is reported as such on Schedule D. Here too, the "Cost or other basis" is the amount of principal remaining unpaid to you and the "Sales price" is almost always zero.
HINT: Generally you can combine bankruptcy notes with your other short term defaults if you are doing a single line entry.RecoveriesA recovery is any payment a borrower made on a note you wrote off as bankrupt or defaulted in an earlier year. A recovery is income in the year you receive it. Both interest and principal you receive is considered income because you essentially deducted your principal as negative income the year you wrote off the bad debt.
HINT: Prosper does not report recoveries to the IRS. The only way to know you had one is to crosscheck your Annual Statement or review your individual note screens. Your failure to catch this detail is not likely to cause any undesirable consequence.If the recovery was interest, do nothing. This amount was or should have been reported to you on your 1099-INT statement as part of the total interest you received. If a portion of the recovery was principal (a payment appears in the Principal column on your note detail screen), enter that amount on Form 1040, Line "Other Income" along with any recovery fees you received. Total all principal you recovered (combine notes if more than one) and any fees received and enter as "Prosper bad debt recovery."
If you had a recovery of principal from a borrower that went bankrupt or defaulted during the current year (the "sale/discharge" shows on your current 1099-B) you can handle it as a single event on Schedule D. Simply use the actual unpaid principal still due at year end as your cost basis. Use Prosper's charge-off date as your date of sale if you are itemizing note losses.
Note Sales on FOLIOfnA note sale is handled like the purchase and sale of any security. They are reported on Schedule D. The sale will be short term if you held the note less than 366 days and long term if you held it more than 365 days.
All the information you need is shown on your annual Prosper Statement. Use their
"Purchase date" and
"Event date" for your "Date acquired" and "Date sold." For Schedule D, Column (d) "Sales price" enter your statement's
"Sale proceeds." Do not use the
"Net sale proceeds" column. For Schedule D, Column (e) "Cost or other basis" add your
"Book value sold" to your
"Transaction fee" and enter this amount (except for rounding your principal value is the same as your book value).
If you sold multiple notes it is permissible to combine all sales on a single line on Schedule D. Enter "various" as the date of purchase and the most recent transaction as the date of sale for combined items. Do separate your sales into two groups as required, short term and long term.
HINT: A separate 1099-B for note sales is issued by Foliofn. The activity is not shown on your Prosper 1099. Go to your Foliofn account to view and print this form for your records. 
