Are Personal Loans Considered Income?

Jason SteeleUpdated March 9, 2023

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

If you’re ready to do your taxes, you may be wondering, does a loan count as income? The answer is no, a personal loan isn’t considered income. A loan is money you borrow and repay, while income is money you earn from a job or an investment. Because you don’t make money from a loan, it doesn’t count as income. However, there are some instances when you might need to report a personal loan on your taxes. For instance, if your loan debt was forgiven, canceled, or discharged, you may need to include it in your taxes.Read on to learn more about personal loan tax implications.

Do You Pay Income Tax on Personal Loans?

There are advantages and disadvantages of personal loans, and one of the advantages is that you typically don’t need to pay taxes on personal loans because they aren’t considered income. But does a loan count as income ever? As long as you repay a personal loan in full, you don’t need to pay income tax on it. However, if your lender forgives part or all of the loan, or if you negotiate a debt settlement for less than you owe, the portion that you don’t repay may be considered income. That amount would need to be reported on your taxes.

What's Considered Taxable Income

Is a loan considered income? Generally, no. Taxable income includes things like wages, salaries, freelance earnings, investments, tips, and bonuses. But, as mentioned, if you have a debt or loan that was canceled or forgiven, it may count as taxable income. Nontaxable income is money you earn through something other than employment or an investment. Some examples of nontaxable income include child support, alimony, scholarships, gifts, cash rebates, grants, veteran benefits, and welfare benefits.Recommended: What Is a Tax Refund Loan?

Federal Income Tax Brackets

The federal income tax system is progressive, which means that the more taxable income you have, the more your tax rate increases. There are different tax brackets for federal income taxes, with different tax rates for each range. The IRS sets the federal income tax brackets every year. For 2022, there are seven tax brackets ranging from 10% to 37%. Knowing what’s considered taxable income is important for determining what income tax bracket you’re in.

Do You Have to Report Personal Loans on Your Taxes?

You generally don’t need to report personal loans on your income taxes. However, if part or all of your personal loan was canceled, forgiven, or discharged, you will need to report the portion that was forgiven or canceled on your tax return.

How Taxes Work on Personal Loans

First let’s go over how personal loans work. After you’re approved for the loan, you will receive a lump sum, which is the loan principal. You’ll then repay the loan, plus interest, monthly, over a set period of time. Interest rates vary by lender, the loan, and other factors, including your credit score and credit history. That’s why, when you take out a loan, it’s important to shop around for the best personal loan offers you can get.Is a personal loan taxable? No, as long as you repay a personal loan fully, you typically don’t have to report it on your taxes.You may be wondering if personal loan interest is tax deductible. The interest payments on personal loans are usually not tax-deductible. However, if you can show that you used a personal loan for a business need, your interest payments on the loan may be tax-deductible. Or, if you used all of the personal loan funds to finance a qualified educational expense, you may be able to take a tax deduction on the loan. In these cases, you may want to consult with a tax professional.

Are Friend and Family Loans Taxable?

Like personal loans from banks and credit unions, personal loans from a friend or family member aren’t considered taxable income. However, if a family loan charges the borrower no interest, or has a below-market interest rate, the IRS may consider the loan to be a gift, and not a loan. In this case, the person who gave you the money might have to report it on their taxes, depending on the amount. In 2022, if the friend or family member lent you more than $16,000, which is the current maximum gift tax exclusion, they might have to file IRS Form 709. (Fortunately, they won’t pay any gift taxes unless they have gifted more than the maximum lifetime gift tax exemption amount, which was $12.06 million in 2022.) But you, as the borrower, will not have to report the family loan on your taxes.

How Taxes Work on Cancellation of Debt (COD)

If you’re having trouble repaying your loan, you can talk to your lender and see if they’ll give you deferred personal loan payments. If they won’t, and you’re still unable to make your payments, your loan may go to collections or into default. In this case, you might choose to work with a credit counseling agency, which could help you negotiate a new payment plan with the lender. Or, the lender may forgive part of your loan. If the lender forgives a portion of the loan, they’ll issue you a cancellation of debt (COD) on the canceled amount. Once you receive a COD, you’re no longer responsible for paying back that amount. The lender will also send you a 1099-C form that you’ll need to file with your taxes, and you’ll have to pay taxes on the amount that was canceled.

What Types of Loans are Exempt from Taxes?

Most types of loans are exempt from income taxes, since loans are not income. However, interest payments on some types of loans, such as student loans, mortgages, and business loans, can be reported as tax deductions.

Compare Personal Loans With Lantern

In most cases, you won’t need to pay income tax on a personal loan because they aren’t considered income. However, you should always consult a certified public accountant (CPA), or other tax professional if you have questions or concerns about your taxes.If you’re looking to apply for a new personal loan, Lantern can help. In our marketplace, you can quickly and easily compare the top personal loans from multiple lenders to find the one that’s right for you.

Frequently Asked Questions

Is a personal loan considered income?

Do you pay income tax on personal loans?

Can you loan money to a family member tax free?

Photo credit: iStock/damircudic

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About the Author

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.

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