Are personal loans taxable?

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• A personal loan is a loan contract between a borrower and a lender.
• The loan is not considered income and there's generally no tax reporting required.
• The only time a personal loan may be taxable income is if all or some of the debt is canceled.

A personal loan gives you a one-time, lump sum of cash which you repay in fixed monthly payments. It's a popular financing option for people who need money quickly and want flexibility in how they spend it. 

Proceeds from a personal loan may feel like income to a borrower, but the IRS doesn't treat it that way. Here are the tax implications of a personal loan.

Are personal loans taxable?

The lump sum you get from a personal loan isn't taxable as income. Even though you're getting a cash infusion to your bank account, and you can spend that money however you want, a personal loan is a form of debt, not income.

Sometimes personal loans are marketed as home improvement loans or wedding loans. But these loans are no different than a personal loan, where you borrow a specific amount of money and repay it in fixed installments over several months or years.

Is a loan considered income?

The Internal Revenue Service taxes earned income, like wages and salaries, and certain unearned income, like capital gains from investments. The recipient of a loan, gift, or grant is not responsible for paying taxes on the amount they get.

"While personal loans may look like income, the fact that they are paid back makes it an even transaction," says Caitlynn Eldridge, a Certified Public Accountant in Omaha, Nebraska.

While your "income" — the money you have available to spend — temporarily goes up when you get a personal loan, you'll end up sending an equal sum back to the bank or credit union you borrowed from, plus interest payments, so your income technically isn't increasing.

Cancellation of a personal loan is one exception. If a lender decides to cancel, forgive, or discharge all or part of your personal loan balance, the amount you no longer have to pay will generally be taxable. 

Is personal loan interest tax deductible?

Depending on the size of your personal loan and your rate, interest can be a considerable expense. But unfortunately, the IRS doesn't offer a tax break for that.

"Student loan and mortgage interest is specifically deductible due to laws and regulations passed. Personal loan interest is no different than credit card interest in the eyes of the IRS, and therefore is not deductible," says Jay Zigmont, a CFP® professional and founder of Childfree Wealth.

However, if you used a personal loan to pay for things related to investments or your business, you may be able to deduct the interest payments. This requires keeping track of exactly how much of the loan proceeds were used in each category and allocating the interest payments accordingly.  

When to report personal loans on your taxes

There's no tax reporting requirement for simply taking out a personal loan and repaying it.

"The 'tax' piece of the pie likely gets picked up in different ways," Eldridge says. "Think sales taxes if you used the proceeds to buy goods, income taxes for someone else if you bought services from them, or property taxes if you used the loan to improve your home."

If you have a personal loan that's been canceled, forgiven, or discharged, you do have to report it on your federal tax return. Some exclusions apply, including debt discharged in a Chapter 11 bankruptcy case.