How to report income and losses from Prosper on your taxes.
The following information is provided for reference purposes only. You should consult with a professional tax adviser for more specific instructions based on your individual circumstances.
First, here is Prosper's tax information page.
Interest you received is reported as ordinary interest on Schedule B as interest from Prosper.
The late fee payments received, also reported on 1099-MISC box 3, according to the instructions for 1099-MISC, get reported on the "other income" line on Form 1040 and identified as from Prosper. This income is not subject to self-employment taxes.
The "Service fees paid" from the annual statement go on Schedule A in the "Miscellaneous Expenses" section where one lists investment expenses, unreimbursed employee expenses, union dues, tax preparer fees, etc., and 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.)
Group Leader Rewards
(For group leaders who receive rewards only.) Need more info here. Report as "other income"?
Group Leaders have the option of filing as a Schedule C business or just reporting the income as "other income." If the other income option is chosen, this income is subject to self-employment taxes. If a group leader files as a Schedule C, they have the option of reporting expenses in connection with the business which will lower their taxable income.
Report as "other income" similar to Late Fees above.
If Prosper sells a loan to a JDB (Junk Debt Buyer), it becomes a sale of a security as far as Schedule D goes, and it is handled like the purchase and sales of a security: it is long term or short term based on the holding period (if held for at least 1 year plus 1 day, it is long term), which determines which section of Schedule D this loan goes in; your purchase price is reduced by the amount of returned principal, so the number in "Pre-Sale Principal Balance" from the annual statement should be used; and the "Net Proceeds" (box 2) of the 1099-B (or, if you don't have a 1099-B, the "Net proceeds from sale" from the bottom of the annual statement) would be your Sale Price for Schedule D.
If a loan becomes worthless so Prosper informs us that it is worth $0.00 (e.g., from bankruptcy), it becomes a short-term capital loss and is reported on Schedule D. The "Purchase price" is reduced by the amount of the principal, so one needs to find the "Pre-sale Principal Balance" from the bottom of the Annual Report to use as your purchase price on Schedule D.
One can reference "IRS Publication 550" for more information about Nonbusiness Bad Detbs and why this is considered a short-term capital loss.