Put simply, no, personal loans are usually not taxable as income. We cannot give you tax advice and you should consult with a tax professional about your specific situation. You generally do not owe taxes on a personal loan unless that loan is forgiven or canceled before you’ve paid it back in full. When you take a personal loan, the loan amount is usually not considered to be earned income.
Why? Because loans are temporary and once you’ve paid them back with interest, you haven’t grown your wealth or income with that money. However, while your personal loan won’t be taxed as income, you probably won’t be able to deduct the loan interest like you might be able to do with a mortgage or home equity loan.
Still, when taking out a personal loan, it’s always wise to be completely up-to-date on all related tax implications. While the IRS usually requires taxes to be paid on money you receive, knowing the key differences between a loan and income could help clarify any confusion when doing your taxes.
Loans vs. income
The IRS states that when you borrow money — be it from a bank, a peer-to-peer lender or a friend — it is considered debt if you are obligated to pay it back. And, generally, that debt does not become taxable unless it is discharged (canceled or forgiven). If that debt is discharged, you may well owe taxes on the amount you don’t pay back.
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
More on canceled debt
If 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 exclusions 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 if you are insolvent.
But if you have a major expense to cover, or are looking to consolidate debt, you needn’t worry about a personal loan complicating your taxable income during tax time.
More on personal loans
Before you apply for a personal loan, ask yourself a few questions and consider important factors such as 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 can help you reduce stress. 88% of surveyed customers who consolidated debt with a Discover personal loan told us they felt less stressed.* And feeling less stressed when thinking about preparing taxes can be a good thing.
If you have back taxes to pay, a personal loan can help. Read More