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[mothandrust]

I think the key here is that they are going to deduct interest that you received from your losses also, which in some cases might reduce or eliminate the chargeoff for a particular loan completely. Personally, I am not going to do the math, but I expect that my estimate of $900-$950 of net chargeoffs will be cut in half or more.

Prosper is paying out $10M to get this thing settled so presumably they are ambivalent how it is divided.

If plaintiffs wanted to divide it based on unpaid principal, would Prosper raise a fuss?

Winners are those who picked loans that went bad quickly, like someone whose portfolio was largely D, E, and HR loans (known to make few payments and go bad quickly). 

Losers are those who picked loans that stayed current a long time or those that made recovery payments.  (If the borrower pays $100, it reduces the outstanding P&I by $100, but the lender actually got only $73). 

If your portfolio was a green circle for a long time, you lose on this settlement and Muleshoes wins.

[ira01]

I think the key here is that they are going to deduct interest that you received from your losses also, which in some cases might reduce or eliminate the chargeoff for a particular loan completely. Personally, I am not going to do the math, but I expect that my estimate of $900-$950 of net chargeoffs will be cut in half or more.

Prosper is paying out $10M to get this thing settled so presumably they are ambivalent how it is divided.

If plaintiffs wanted to divide it based on unpaid principal, would Prosper raise a fuss?

Winners are those who picked loans that went bad quickly, like someone whose portfolio was largely D, E, and HR loans (known to make few payments and go bad quickly). 

Losers are those who picked loans that stayed current a long time or those that made recovery payments.  (If the borrower pays $100, it reduces the outstanding P&I by $100, but the lender actually got only $73). 

If your portfolio was a green circle for a long time, you lose on this settlement and Muleshoes wins.

Which doesn't change the fact that he will still wind up a big loser, of course.  I'm sure you wouldn't want to trade performance with him.

[havastat]

Got a settlement notice.

[mothandrust]

Which doesn't change the fact that he will still wind up a big loser, of course.  I'm sure you wouldn't want to trade performance with him.

In other words, I should shut up while he gets 22 cents on every dollar of principal lost while I get 16 cents.

[ira01]

Which doesn't change the fact that he will still wind up a big loser, of course.  I'm sure you wouldn't want to trade performance with him.

In other words, I should shut up while he gets 22 cents on every dollar of principal lost while I get 16 cents.

Yes, because dollars are dollars -- it doesn't matter whether you label them "principal" or "interest," what matters is how many you got (or didn't get).

[Beachey]

I got my notice as well, anyone have any idea on the tax treatment of these payments?

[rogerwaite]

I got my notice as well, anyone have any idea on the tax treatment of these payments?

I'm going to jump out there and say as a settlement it is not taxable.

[mothandrust]

Funny, those interest payments (less 27% that Prosper or its agent took as a collections fee) were taxable but Muleshoes' settlement windfall is not?

[ira01]

I got my notice as well, anyone have any idea on the tax treatment of these payments?

I'm going to jump out there and say as a settlement it is not taxable.

Of course it's taxable.  You took (or should have taken) a deduction when the loans went bad.  Now this recovery is taxable, just as a voluntary payment by a borrower is taxable.   

[rogerwaite]

I got my notice as well, anyone have any idea on the tax treatment of these payments?

I'm going to jump out there and say as a settlement it is not taxable.

Of course it's taxable.  You took (or should have taken) a deduction when the loans went bad.  Now this recovery is taxable, just as a voluntary payment by a borrower is taxable.   

Take a look at the 1st paragraph on the second page at this link.

http://www.irs.gov/pub/irs-pdf/p4345.pdf

I'm thinking that we're recovering only a portion of principle only, not profit. But as you say if we previously reduced our income based on the loss. I was thinking back from tax class that most law suit settlements were not taxable, but that's probably about individuals and not a business type suit.

[cubbiesnextyr]

I got my notice as well, anyone have any idea on the tax treatment of these payments?

I'm going to jump out there and say as a settlement it is not taxable.

Of course it's taxable.  You took (or should have taken) a deduction when the loans went bad.  Now this recovery is taxable, just as a voluntary payment by a borrower is taxable.   

Correct.  The character of the income will be based on how you claimed the loss.  If you claimed the loss as a short-term capital loss (what I believe was the correct way to do it) the settlement check will be now be a short-term capital gain.  If you claimed long-term capital losses, the settlement will be long-term gains.  If you did both, now you've got to do some math and allocate some of the settlement as short-term and some as long-term.  If you opted to file this as a Sch C and claimed this as ordinary losses, then the settlement would be ordinary income.

Any interest paid on the settlement money would be interest income to you.

[cubbiesnextyr]

I got my notice as well, anyone have any idea on the tax treatment of these payments?

I'm going to jump out there and say as a settlement it is not taxable.

Of course it's taxable.  You took (or should have taken) a deduction when the loans went bad.  Now this recovery is taxable, just as a voluntary payment by a borrower is taxable.   

Take a look at the 1st paragraph on the second page at this link.

http://www.irs.gov/pub/irs-pdf/p4345.pdf

I'm thinking that we're recovering only a portion of principle only, not profit. But as you say if we previously reduced our income based on the loss. I was thinking back from tax class that most law suit settlements were not taxable, but that's probably about individuals and not a business type suit.

Many lawsuit settlements aren't taxable because they're for personal injury which is exempt.  But this is not that.  Now, if you never deducted the losses on your return, these would be return of principal up to the amount loaned and thus not taxable, anything above that would be a capital gain.

[rogerwaite]

I got my notice as well, anyone have any idea on the tax treatment of these payments?

I'm going to jump out there and say as a settlement it is not taxable.

Of course it's taxable.  You took (or should have taken) a deduction when the loans went bad.  Now this recovery is taxable, just as a voluntary payment by a borrower is taxable.   

Take a look at the 1st paragraph on the second page at this link.

http://www.irs.gov/pub/irs-pdf/p4345.pdf

I'm thinking that we're recovering only a portion of principle only, not profit. But as you say if we previously reduced our income based on the loss. I was thinking back from tax class that most law suit settlements were not taxable, but that's probably about individuals and not a business type suit.

Many lawsuit settlements aren't taxable because they're for personal injury which is exempt.  But this is not that.  Now, if you never deducted the losses on your return, these would be return of principal up to the amount loaned and thus not taxable, anything above that would be a capital gain.

See I knew I could jump out there, cause I had a safety net. 

[puckhead]

  

Correct.  The character of the income will be based on how you claimed the loss.  If you claimed the loss as a short-term capital loss (what I believe was the correct way to do it) the settlement check will be now be a short-term capital gain.  If you claimed long-term capital losses, the settlement will be long-term gains.  If you did both, now you've got to do some math and allocate some of the settlement as short-term and some as long-term.  If you opted to file this as a Sch C and claimed this as ordinary losses, then the settlement would be ordinary income.

Any interest paid on the settlement money would be interest income to you.

What if you never bothered to claim a loss?

[cubbiesnextyr]

 

Correct.  The character of the income will be based on how you claimed the loss.  If you claimed the loss as a short-term capital loss (what I believe was the correct way to do it) the settlement check will be now be a short-term capital gain.  If you claimed long-term capital losses, the settlement will be long-term gains.  If you did both, now you've got to do some math and allocate some of the settlement as short-term and some as long-term.  If you opted to file this as a Sch C and claimed this as ordinary losses, then the settlement would be ordinary income.

Any interest paid on the settlement money would be interest income to you.

What if you never bothered to claim a loss?

Then the settlement money would not be taxable to you as it's a return of principal.  To cover your bases, you might still want to report it on Sch D and indicate it's a return of principal and it wouldn't increase your income.

Of course, all my statements here are not tax advice and you should consult your tax professional.  I don't know if Circ 230 applies, but I'll include it anyway:  To ensure compliance with requirements imposed by the Internal Revenue Service, we are required to inform you that this correspondence and any related attachments are not intended or written to be used, nor can they be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer.