Your business checking account pays next to nothing, and someone just told you peer-to-peer lending platforms pay investors 6% to 12% a year. That spread looks like free money — until tax season arrives and you discover the yield came with three different tax forms, platform fees you cannot deduct the way you expected, and a defaulted loan the IRS treats very differently from an ordinary business loss.
P2P lending can still be a reasonable place to park idle business cash. But the bookkeeping is trickier than a savings account, and the mistakes are expensive. Here is how to record every piece of it correctly: the interest income, the platform fees, and the bad debt deduction when a borrower stops paying.
The P2P Landscape in 2026: Smaller Than You Remember
Peer-to-peer lending is no longer the disruptive free-for-all it was a decade ago. LendingClub — the company that pioneered retail P2P notes in the United States — shut down its retail investor platform at the end of 2020 and reinvented itself as a digital bank. Prosper remains the largest U.S. marketplace still accepting everyday retail investors alongside institutional capital, joined by smaller niche platforms.
That consolidation matters for your books in two ways. First, the tax-reporting conventions below follow the Prosper model (1099-OID plus 1099-B), which is now the de facto standard. Second, advertised yields need careful reading: borrowers on these platforms commonly pay 15% to 16% interest, but after platform fees and defaults, retail investors typically net in the 5% to 8% range. Industry data puts typical gross investor yields at 6% to 12% before losses. Defaults are not an accident in this asset class — they are the cost of the yield, and your bookkeeping has to treat them as a planned expense category, not a surprise.
What the Platform Sends You at Tax Time
A savings account sends one form. A P2P platform can send three, and mixing them up is the single most common filing error.
Form 1099-OID: your interest income
If you earned $10 or more in net interest during the year, expect a Form 1099-OID (Original Issue Discount), not the 1099-INT your bank sends. P2P notes are technically OID obligations, so interest lands in Box 1 of the 1099-OID. Report it as ordinary interest income on your return — the same line where bank interest goes.
Two details trip people up:
- The $10 threshold cuts both ways. The platform must send the form at $10 or more of interest. Below $10, you may get nothing — but the income is still taxable and you are still required to report it. Pull the number from your year-end account statement.
- Total interest over $1,500 means Schedule B. If your combined taxable interest from all sources exceeds $1,500, list each payer on Schedule B (Form 1040) and attach it. A P2P portfolio plus a business savings account crosses that line faster than most owners expect.
Form 1099-B: recoveries and note sales
When a charged-off loan produces a later recovery — the platform collects $40 on a note you wrote off last year — those proceeds arrive on Form 1099-B, the same form brokers use for stock sales. Note sales on a secondary trading platform, where available, are reported here too. You will need your cost basis in each note to compute the gain or loss, which is why per-note records (more below) are non-negotiable.
Form 1099-MISC: everything else
Late fees passed through to you, referral bonuses, and promotional incentives of $600 or more arrive on Form 1099-MISC as other income. These are easy to miss because they feel like platform trivia rather than income. The IRS does not share that feeling.
Platform Fees: Netted Against Interest, Not Separately Deducted
Every P2P platform takes a servicing cut — typically around 1% annually on outstanding principal, plus collection fees on late payments. New investors naturally ask where to deduct those fees. The answer surprises them: you generally do not deduct them at all, because the platform already subtracted them before reporting your income.
Prosper's tax guide states this explicitly: the "net interest" on your 1099-OID equals interest earned less any collection or servicing fees deducted by the platform. The fee never appears as a separate line item on your return. It simply shrinks the income number.
This netting is actually favorable. Since the 2017 tax overhaul suspended miscellaneous itemized deductions for investment expenses, unreimbursed investment fees are not deductible on Schedule A anyway. Getting the fee netted against interest dollar-for-dollar is a better outcome than a deduction most investors could no longer claim.
For your books, the clean approach is to mirror the tax form:
- Record interest income net of servicing fees, so your ledger ties directly to Box 1 of the 1099-OID.
- Keep the platform's fee schedule and monthly statements on file so you can show the gross-to-net walk if anyone asks.
- Resist the temptation to book gross interest as income and fees as a separate expense. That leaves your ledger permanently out of agreement with the filed form, which is exactly the kind of mismatch that draws questions.
One exception: if lending is genuinely your trade or business — you operate a lending business, not a side investment of idle cash — fees and losses follow business rules instead. That is a high bar most small business owners will not meet for a P2P side portfolio, and you should get professional advice before claiming it.
When a Borrower Defaults: The Bad-Debt Rules
Some of your notes will default. How you write them off depends entirely on one classification: business or nonbusiness bad debt.
Most investors hold nonbusiness bad debt
A debt is a business bad debt only if it was created or acquired in connection with your trade or business, or if the loss is closely related to that business. Parking excess working capital in P2P notes is an investment activity, not a lending trade or business — so your defaults are almost always nonbusiness bad debts, with harsher rules:
- The debt must be totally worthless. You cannot deduct a partially worthless nonbusiness bad debt. If the platform has charged the loan off and collection efforts have ended, that is your documentation of total worthlessness. A loan that is merely delinquent is not deductible yet, no matter how bleak it looks.
- The deduction is a short-term capital loss, not an ordinary deduction. Report it on Form 8949 (Part 1, line 1), entering the debtor's name and "bad debt statement attached" in column (a), your basis in column (e), and zero as proceeds in column (d).
- Capital loss limitations apply. The loss first offsets capital gains, then up to $3,000 per year of ordinary income ($1,500 if married filing separately). The excess carries forward. A $9,000 default with no capital gains takes three tax years to fully absorb.
- You must attach a statement. The return needs a bad-debt statement describing the debt, the debtor, your relationship to the debtor, the efforts to collect, and why you concluded it became worthless this year. Your platform's charge-off detail report is the backbone of that statement.
The timing trap: charge-off year vs. recovery year
Defaults and recoveries rarely land in the same year. Suppose a $500 note defaults in 2026 and you claim the capital loss. In 2027, the platform recovers $60 and reports it on a 1099-B. That $60 is 2027 income (or gain against a zero basis) — it does not retroactively change your 2026 deduction. Your per-note ledger must track each note across years: original basis, loss claimed, and subsequent recoveries. Without that trail, you will either miss the recovery income or double-count the loss.
Setting Up Your Books: A Per-Note System That Survives an Audit
P2P bookkeeping fails when owners treat the platform balance as a single blob. Set it up as a mini-loan portfolio instead:
- One asset account for the P2P portfolio, with a supporting schedule — a spreadsheet is fine — tracking each note: funding date, principal, interest received, fees netted, status, and remaining basis.
- Monthly reconciliation. Match each monthly statement's interest, principal repayments, fees, and charge-offs to your schedule. Principal repayments are not income — they are a return of basis. Only the interest portion hits your income account.
- Cash basis for most investors. Interest is taxable when credited or paid to you, not when it accrues on a delinquent loan. If your business files on the accrual method, apply that method to the portfolio consistently and document the choice.
- Separate the portfolio from operating cash. Fund P2P notes from a distinct transfer out of operating funds, and sweep repayments back through the same path. Commingling makes it impossible to prove which dollars are business funds and which are investment returns.
- Plan for estimated taxes. Nothing is withheld from P2P interest. If the portfolio is large enough to move your tax bill, fold the expected interest into quarterly estimated payments to avoid an underpayment penalty.
Five Mistakes That Cost P2P Investors Real Money
1. Ignoring income under $10 with no form. No 1099-OID does not mean no taxable income. The platform's annual statement has the number — report it.
2. Deducting fees on top of net interest. If your 1099-OID already reflects net interest, claiming servicing fees again as an investment expense double-counts the benefit. The IRS matches the form; your return should start from it.
3. Writing off delinquent loans early. Only totally worthless debts qualify. A 90-day-late note with active collection is not deductible, and claiming it early creates a mess when payments resume.
4. Putting P2P interest on Schedule C. Interest from an investment portfolio is investment interest income, not business revenue — even if the cash came from your business account. Schedule C treatment overstates self-employment income and invites questions. (The mirror image: if your business borrows through a P2P platform, the interest you pay generally is an ordinary business interest expense. Investor-side and borrower-side rules are completely different.)
5. Forgetting state tax. Most states tax P2P interest as ordinary income, and a few conform awkwardly to federal bad-debt carryforward rules. Check your state's treatment before assuming the federal loss flows through cleanly.
Keep Your Lending Records Audit-Ready
Peer-to-peer lending rewards the investor who treats it like a small loan business on paper: per-note basis tracking, monthly reconciliations, charge-off documentation filed with the return, and recovery income picked up in the right year. The yield is real, but so is the paperwork — and the investors who get hurt are the ones who discover the paperwork in April.
As your portfolio grows, keeping investment records in the same transparent system as the rest of your finances pays off. Beancount.io provides plain-text accounting that gives you complete transparency and control over your financial data — no black boxes, no vendor lock-in. Get started for free and see why developers and finance professionals are switching to plain-text accounting.
