Are Personal Loans Taxable?

Personal loan taxes

Generally, personal loan borrowers don’t owe taxes on personal loan funds, unless that loan is forgiven or cancelled before being paid back in full. That’s because while the IRS usually requires taxes to be paid on money you receive, when you take out a personal loan, the loan funds are usually not considered to be earned income. Rather, they’re temporary. Once you’ve paid the loan back, you haven’t grown your wealth or income.

Note that while your personal loan won’t be taxed as income, your interest payments on your personal loan probably wouldn’t be considered a potential tax deduction, as might be the case with a mortgage or home equity loan.

It’s always wise to be up to date on all personal loan tax implications. Knowing the key differences between a loan and income could help clarify any confusion, and could answer questions at tax time, like “When would I owe on taxes from a personal loan?”

Does a loan count as income?

The IRS states that when you borrow money — be it from a bank, a peer-to-peer lender, or a friend — it's considered debt if you're obligated to pay it back. This debt isn’t considered income and won’t be taxed like income. Loans that are not taxed as income include:

Personal loans for credit card consolidation or major purchases
Mortgage loans to purchase personal real estate or investment property
Student loans

Examples of taxable income include:

Salary or bonus paid to you by your employer
Investment income from stocks, bonds, mutual funds, or ETFs
Real estate rental income

Is loan forgiveness taxable?

You may be wondering, when could a personal loan become taxable? Generally, debt doesn’t become taxable unless it’s discharged (canceled or forgiven). If that debt is discharged, you may owe taxes on the amount you don’t pay back. You’ll need to report the canceled or forgiven debt amount on your tax return for the year it was canceled.

More on canceled debt

If your tax advisor says that you’re obligated to report the taxable amount on canceled or forgiven debt, you would do so on the U.S. Individual Income Tax Return Form 1040.

There are, however, exceptions and exlusions outlined by the IRS. These may include debt that was canceled as a gift or inheritance. Beyond that, you may be able to exclude debt from your income if canceled due to bankruptcy or insolvency.

Personal loan taxes

If you have a major expense to cover, or are looking to consolidate debt, a personal loan isn’t likely to complicate your taxable income during tax time. If you have back taxes to pay, a personal loan could help, too, by providing the funds to clear past due taxes and a simple and predictable plan to pay off the amount borrowed to do so.

Before you apply for a personal loan, ask yourself a few questions and consider important factors like the trustworthiness of the provider and the terms they offer, such as origination fees, annual percentage rate (APR), and whether there are any prepayment penalties.

A personal loan may help you reduce financial stress. 85% of surveyed customers told us they felt less stressed after consolidating debt with a Discover personal loan.* And feeling less stressed when thinking about preparing taxes can be a good thing.