Do You Have to Report Interest From a Personal Loan on Your Taxes?

If you're the lender on a personal loan, the interest income you collect is generally taxable and has to be reported, even when the loan is an informal one between friends or family and nobody sent you a tax form. The Internal Revenue Service (IRS) treats interest you receive much like interest from a bank account: it's ordinary income for the year you receive it. Here's exactly how reporting works on the lender side, what the borrower can and can't deduct, and a rule that can create taxable interest even when you charged little or none.

Interest you receive is taxable income

When you lend money under a promissory note and charge interest, the interest portion of each payment is taxable income to you. The principal being repaid is not income, because that's your own money coming back, but the interest is the return you earned on it, and the IRS taxes it as ordinary income. This applies whether the borrower is a stranger, a business, or your own cousin, and whether or not you ever receive a 1099-INT form. The obligation to report doesn't depend on getting paperwork.

Keep clean records of what you receive and how much of each payment is interest versus principal. On an amortizing loan those proportions shift every month, so a simple payment log or amortization schedule makes tax time far easier and backs up the number you report.

Timing matters too. Most individuals report on a cash basis, which means you report interest in the year you actually receive it, not the year it was due on paper. If a borrower skips a payment in one year and catches up the next, the income generally lands in the year the money reaches you. That's another reason a dated record of every payment received is worth keeping from the first month of the loan.

How the lender reports it: Schedule B

Individual lenders report taxable interest on their Form 1040. According to the IRS, you generally must file Schedule B (the Interest and Ordinary Dividends schedule) if your total taxable interest for the year is over $1,500, listing each payer's name and the amount of interest received. Below that threshold, the interest is still taxable and still gets reported on your return, you just may not need the separate Schedule B to itemize each source.

For a private loan, you'd list the borrower as the payer and the interest you collected as the amount. If you also earned interest from banks or brokerages, it goes on the same schedule alongside your loan. The takeaway is simple: the income is reportable regardless of the dollar amount, and Schedule B is where it lands once you cross the filing threshold. Because the borrower isn't a bank, no one is likely to mail you a form, so the accuracy of what you report rests entirely on the records you kept during the year.

The borrower usually can't deduct the interest

Borrowers often assume that if the lender pays tax on the interest, they must get to deduct it. For personal loans, that's usually not the case. Interest on money borrowed for personal use, such as a car for personal driving, a vacation, or covering everyday bills, is generally nondeductible personal interest. The deduction rules that let people write off mortgage interest or certain business and investment interest don't extend to ordinary personal borrowing.

So the money can be taxable on one side without being deductible on the other. The lender reports the interest as income while the borrower simply pays it out of pocket with no tax benefit. If a loan is genuinely used for business or investment purposes, different rules may apply, and that's worth a conversation with a tax professional before either side assumes a deduction exists.

The practical lesson for a private loan is to be clear about the loan's purpose from the start and not to promise the borrower a write-off you can't back up. Telling a friend the interest is deductible when it's personal borrowing sets them up for a surprise. If the deduction question actually matters to the deal, pin it down with a tax professional before the note is signed rather than after the borrower has already filed.

The imputed-interest rule on below-market loans

Here's the part that surprises casual lenders. The IRS has rules for below-market loans, meaning loans that charge interest below the applicable federal rate (AFR), the benchmark rate the IRS publishes. If you lend at a rate under the AFR, or charge no interest at all, the tax code can treat you as though you charged the going rate anyway. The difference between the AFR and what you actually charged is called forgone interest, and the rules can require you to report that forgone interest as income even though you never collected it.

There's meaningful relief for small loans. The IRS provides an exception for loans of $10,000 or less, which generally keeps these below-market rules from applying to modest, informal loans between family and friends. Once a loan climbs above that level, the imputed-interest rules can kick in, so if you're making a larger loan at a low or zero rate, either set the rate at or above the current AFR or go in understanding you may owe tax on interest you chose not to charge. And while you're setting a rate, make sure it's legal in your state by checking our usury limit checker.

The bottom line for private lenders

Charging interest on a loan comes with a tax duty most casual lenders overlook. Report the interest you receive, keep records that separate principal from interest, and don't count on the borrower deducting it because personal-loan interest generally isn't deductible. If you're lending more than $10,000, respect the below-market loan rules by charging at least the applicable federal rate or accepting that imputed interest may be taxed. Tax rules change from year to year and personal situations differ, so confirm the current figures on irs.gov or with a tax professional before you file.

Sources

• IRS Instructions for Schedule B (Form 1040)
• IRS Publication 550, Investment Income and Expenses