Are Personal Loans Taxable?

Are Personal Loans Taxable?

Personal loans are one of the most popular financing tools, offering borrowers the flexibility to access funds for various purposes — such as consolidating debt, covering unexpected expenses, or making a large purchase.

Despite their widespread use, many borrowers remain unclear about the potential tax implications of personal loans. A common question is: Are personal loans taxable?

The quick answer is generally no. Personal loans are not typically subject to taxation because they are considered debt, not income. However, there are exceptions to this rule.

This article offers an overview of the tax treatment of personal loans, including situations where taxes may apply and whether interest payments are tax-deductible

Are personal loan proceeds taxable?

Proceeds from the following types of loans are not considered taxable income, as they are a form of borrowed money, which you are legally obligated to repay:

• personal loans
• cash loans
• online loans
• cash advance loans
• installment loans
• online loans

For example, if you borrow $10,000 from a lender, you don’t report that amount as income on your tax return. It’s viewed as a temporary financial resource rather than a gain. As long as the loan is repaid, it is not treated as income, which means you won’t owe taxes on the funds you borrowed. You don’t even need to include the loan in your tax returns.

However, there are some exceptions to this rule, as we’ll see in the next section.

Under what circumstances can personal loans be taxed?

There are specific scenarios where personal loans may have tax implications.

One of the most common scenarios where taxes may apply is if part or all of the loan is forgiven. In such a situation, the Internal Revenue Service (IRS) might consider that forgiven or discharged amount as taxable income. So even though you no longer have to repay the forgiven amount, you may still have to report it as income on your tax return.

If the forgiven amount is $600 or more, the lender is required to send both you and the IRS a Form 1099-C, detailing the cancelled amount. You can use this form to file your returns. However, note that even if you don’t get this form — for example, because your debt is less than $600 — you’re still obligated to report it as taxable income when filing your taxes.

There are exceptions where you might not have to report forgiven personal loan as taxable income including:

• The discharge was a result of bankruptcy.
• You’re insolvent (i.e. your liabilities exceed your assets).

To fully understand whether forgiven debt is subject to taxation, consult a qualified tax professional.

Is interest on personal loans tax-deductible?

In general, the interest paid on personal loans is not tax-deductible. However, there are situations where personal loan interest might be deductible including the following.

Business expenses

If you use a personal loan for business purposes — such as purchasing business equipment or inventory or covering operational expenses — the interest on that portion of the loan may be deductible. To qualify, you’ll need to clearly document how the loan proceeds were used and report it accurately when filing taxes.

Qualifying educational expenses

If you use funds from a personal loan to pay for certain education expenses like college tuition or fees, or to refinance a student loan, it could count as a qualified student loan — which is then eligible for student loan interest deduction.

Taxable investments

If the loan is used to fund investments that generate taxable income, the interest could be deductible under the investment interest expense rules. For example, if you take out a personal loan to invest in stocks, bonds, or other income-producing assets, the interest on the loan may be eligible for deduction.

Again, for all the above situations, it's advisable to consult a qualified tax professional. They can help you understand the nuances of tax laws and ensure you maximize any potential deductions available to you.

Also worth keeping in mind is that some lenders prohibit the use of personal loans for certain uses. For instance, some don’t allow you to use personal loans for educational expenses. Check your lender’s approved used cases for personal loans before you apply for one. 

Are personal loan repayments tax-deductible?

As we saw above, interest on personal loans may be tax-deductible in some circumstances.

Principal repayments, however, are generally not tax deductible regardless of how the loan proceeds were used. Again, this is because personal loan proceeds are not considered taxable income. Repaying these proceeds therefore will not affect your taxes in any way.

What about personal loans from friends or family?

When a friend or family member loans you money that they expect you to pay back — and which consequently doesn’t qualify as a “gift” — the IRS may require them to report “imputed interest” if the loan is $10,000 or more.

This interest is calculated based on the IRS's Applicable Federal Rate (AFR). Even if you don’t actually pay any interest, the person who lent you the money must report the interest as income.

However, as the borrower, you may be able to deduct this interest under specific circumstances, such as if you used the funds for business, and qualified investment or educational purposes.

Note, however, that if you use the loan for income-generating purposes, the lender still needs to report imputed interest even if the amount loaned was less than $10,000.

As you can see, there are a lot of nuances when it comes to inter-family and friends loans. So yet again, consider consulting with a qualified tax pro to understand the potential tax consequences (if any) of getting a personal loan from a friend or family member.

Practical tips for managing personal loan tax implications

Maintain clear records

Keep detailed records of how you use your personal loan proceeds. This is especially important if you plan to use the money for business purposes or investments, as you may be eligible for tax deductions on the interest. Having organized documentation can make it easier to claim deductions and defend your tax position in case of an audit.

Be aware of loan forgiveness or cancellation

If your loan is forgiven, partially cancelled, or if you default, you may be required to report the forgiven amount as taxable income. It’s important to stay informed of any changes to your loan terms and understand the potential tax consequences.

Seek professional tax guidance and assistance

Tax laws are complex, and personal loan situations can vary greatly. For specific tax advice regarding the deductibility of loan interest or the tax implications of forgiven debt or defaulted loans, it’s always a good idea to consult a qualified tax professional.

Final thoughts: Are personal loans taxable?

In most cases, personal loans are not taxable because they represent borrowed money that you are required to repay, not income. However, as we’ve seen, exceptions such as forgiven or cancelled debt could result in tax obligations. Similarly, while interest on personal loans is generally not tax-deductible, there are limited situations where deductions may apply, such as when you use loan proceeds for business or investment purposes.

Consulting a qualified tax professional is the best way to understand how tax rules apply to your unique situation and thus ensure full compliance.

Finally, when applying for a personal loan, equally as important as understanding the potential tax implications is choosing the right lender.

RISE Credit offers flexible, transparent, and competitive loan options to fit different needs and circumstances. Explore your options with RISE Credit today.

The content provided is for educational and informational purposes only and does not constitute financial or legal advice. RISEcredit.com is not acting as a credit counseling or repair service, debt consolidation service, or credit services organization in providing this content. RISEcredit.com no representation about the reliability or suitability of the information provided – any action you take based on this content is at your own risk.