Personal loans aren’t considered income and therefore usually aren’t taxed. They can still impact your tax filings, though, depending on how you use the funds and whether any portion of your loan is forgiven.
Is a personal loan tax deductible?
A personal loan is a liability, meaning it’s something you owe as opposed to taxable income that you earn. Therefore, personal loans are not tax-deductible, nor is any interest paid on them.
A personal loan functions like any other debt that needs to be paid back, says Clark Kendall, a certified financial planner and CEO of Maryland-based Kendall Capital Management.
It’s “no different than a car loan,” he says. “It can be used to buy a car or go on vacation, but the actual loan is not a taxable event.”
Can a personal loan become taxable?
Depending on how you use the personal loan, it may become a taxable event. Using a personal loan for business expenses is an example.
Any interest paid on the loan would be tax-deductible for the business in some cases. Kendall advises that the money must be used solely for business costs, and that it’s best to consult a tax advisor to understand the implications.
What happens if a personal loan is forgiven?
In rare cases when a lender forgives a portion of a personal loan, the borrower may need to pay taxes on the forgiven amount. This is because forgiveness turns that portion of the loan into income, according to Kendall.
For example, if you received a loan for $10,000 and had $2,000 forgiven, you would need to pay taxes on the $2,000.
If the debt cancellation is taxable, you should receive a Form 1099-C from the debt collector or lender with information about the canceled amount.