Are Personal Loans Taxable?
Written by
Sarah Silbert
Edited by
Melanie Grafil
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Personal loans generally aren’t taxable, but there are some exceptions worth knowing about. Keep reading for more information on personal loan tax implications and whether you have to report loans on taxes.
Are Personal Loans Considered Taxable Income?
Do loans count as income? Generally, personal loans are not considered income because they are borrowed funds that must be repaid. The IRS doesn’t tax borrowed money as earnings, so if you get a personal loan and pay it back over time you won’t be required to pay taxes on it or report the loan on your tax return.
When Could a Personal Loan Be Taxable?
If part of your loan debt is forgiven, such as with a student loan, the forgiven portion may be considered taxable. You would need to report the canceled debt on your tax return for the year in which it was canceled. If a lender cancels any of your loan debt, you may receive a 1099-C form, which applies to canceled debt of $600 or more.
There could be tax implications if a friend or family member loans you money without charging interest or if the interest amount is considered below market rate. There’s an exception for gift loans of $10,000 or less, so this would only apply to larger loans.
Using a Personal Loan for Business Expenses
Another potential exception: If you use a personal loan for business purposes, the interest you pay on that loan may be deductible.
Is Interest on a Personal Loan Tax Deductible?
Interest on a personal loan is generally not tax-deductible when you are using that loan for personal use.
Exceptions include:
- Business expenses: If you use the loan for business expenses, such as if you’re a self-employed individual and weren’t able to qualify for a business loan, the interest may be tax-deductible.
- Taxable investments: If you borrow money specifically to invest, it likely qualifies for deduction.
What If You Receive a 1099-C Form?
If you receive a 1099-C form, it means a lender canceled $600 or more of the debt from your outstanding loan, and the canceled amount may be treated as taxable income. This means you need to report this amount on your tax return unless you qualify for a special exclusion, such as insolvency.
How To Avoid Tax Surprises with Personal Loans
No one wants a surprise tax burden, and you can minimize the chances of that happening by keeping thorough records of your personal loan, including the initial agreement and terms as well as your history of payment. Always ask for written agreements, even if you get a loan from a friend or family member rather than going through a traditional lender.
If any debt from your loan is settled, ask the lender if you can receive a 1099-C form to assist with reporting the settled debt on your tax return.
If you’re unsure whether your personal loan qualifies for deductions or how to handle loan forgiveness on your tax return, speak with a tax advisor to get personalized advice.
Personal Loans vs. Other Types of Loans and Taxes
Here’s how personal loans compare to other types of loans when it comes to their taxabiilty and eligibility for deductions.
| Loan Type | Taxable When Received? | Interest Deductible? |
|---|---|---|
| Personal loan | No | Usually not |
| Student loan | No | Yes, up to $2,500/year |
| Mortgage loan | No | Yes, if itemizing |
| Auto loan | No | No |
| Business loan | No | Yes, if used for business |
Final Thoughts: Do You Need to Worry About Taxes on Personal Loans?
In most cases, you don’t need to worry about taxes on a personal loan. The few exceptions to keep in mind include if part of your loan is canceled, if you used a personal loan for business or if your loan is from a private party rather than a traditional lender.
In any case, your best bet is to keep good records and consult a tax professional for advice.
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