Is the interest I earn on a private loan taxable?

Yes. Interest you receive on a promissory note is taxable income to you as the lender, even on a loan to a family member or friend. You report it on your federal return (typically as interest income on Schedule B if it is large enough). It does not matter that there was no bank or 1099 involved; the obligation to report interest income applies to private lenders too.

Does the borrower owe tax on money they borrow?

No. Borrowed money is not income, because the borrower has to pay it back. Receiving loan proceeds creates no tax. The borrower also generally cannot deduct the principal payments. Interest the borrower pays is only deductible in specific situations, such as mortgage interest on a secured home loan or interest on a genuine business loan; personal-loan interest between individuals is usually not deductible.

What is imputed interest and when does it apply?

If you make a loan over $10,000 and charge little or no interest, the IRS can "impute" interest at its published Applicable Federal Rate (AFR) and treat you as if you earned that interest, even though you did not collect it. You may owe tax on the phantom interest, and the uncollected amount can also be treated as a gift to the borrower. Charging at least the AFR avoids the whole problem. See our imputed-interest guide for the details and the $10,000 exception.

If I forgive the loan, is that taxable to the borrower?

For family and personal loans, forgiving the debt is generally treated as a gift from the lender to the borrower, not as taxable income to the borrower. That brings gift-tax rules into play for the lender (the annual exclusion and lifetime exemption) rather than income tax for the borrower. In a business or employment context the answer can differ, where forgiven debt may be taxable compensation. Our guide on forgiving a family loan walks through the gift-tax side.

Do I need to send a 1099 for interest on a private loan?

Usually not for a one-off private loan between individuals. The 1099-INT reporting requirement primarily falls on businesses and financial institutions that pay interest in the course of a trade or business. The lender still has to report the interest income they receive regardless of whether a 1099 was issued. If you are lending through a business entity, the rules can change, so check with a tax professional.

Can I deduct a loan that the borrower never repaid?

Possibly, as a non-business bad debt, but the bar is high. You must show it was a genuine loan (a written promissory note helps a great deal), that you took real steps to collect, and that the debt became totally worthless. A non-business bad debt is treated as a short-term capital loss. A vague handshake loan with no documentation is very hard to deduct, which is one more reason to put every loan on paper.

Are Promissory Notes Taxable?

Q: Are promissory notes taxable?

The note itself is not taxed, but the money flowing through it can be. The key split is principal versus interest. Repayment of the principal (the amount that was borrowed) is not income to the lender, because it is just getting back money it already had. The interest the lender earns is taxable income and must be reported. For the borrower, receiving the loan is not income, and repaying it is not deductible unless the loan was for a qualifying purpose like a business or a mortgage.

The note itself is not taxed, but the money moving through it can be. Almost all of the confusion clears up once you separate one thing from another: principal versus interest. Here is how each side of a loan is taxed, and where the IRS pays attention.

See the note rules for your state

Tax treatment is federal, but the interest-rate cap, signing rules, and collection deadline that govern your note are set by your state. Pick your state to see them, then build a note that documents the loan cleanly for tax purposes.

Your state

Principal versus interest: the whole idea

Get this distinction and the rest follows. A loan moves money in two directions, and the tax treatment depends on which part you are looking at:

Principal. The amount borrowed. When the borrower repays principal, the lender is simply getting back its own money, so it is not income to the lender. And borrowing money is never income to the borrower, because it has to be paid back.
Interest. The charge for the use of the money. Interest the lender receives is taxable income and must be reported. Interest the borrower pays is only deductible in specific situations (mortgage or genuine business interest), not for ordinary personal loans.

For the lender: report the interest you earn

If you charge interest on a promissory note, that interest is taxable income to you, even on a loan to a relative and even if no bank or 1099 was ever involved. You report it on your federal return, typically as interest income. The return of principal is not reported as income. Keeping a clean payment ledger that separates each payment into interest and principal makes this easy at tax time and protects you if the numbers are ever questioned.

For the borrower: borrowing is not income

Receiving loan proceeds is not taxable, and repaying principal is not deductible. Whether you can deduct the interest you pay depends entirely on what the loan was for. Mortgage interest on a secured home loan and interest on a real business loan can be deductible; interest on a personal loan from a friend or family member generally is not. If deductibility matters to you, the loan's purpose and how the note is structured both matter, so document it clearly.

The trap: imputed interest on low-rate loans

Here is where well-meaning family lenders get surprised. If you lend more than $10,000 and charge little or no interest, the IRS can treat you as if you charged its published Applicable Federal Rate (AFR) anyway. You may owe tax on interest you never actually collected, and the uncollected amount can be treated as a gift to the borrower. The fix is simple: charge at least the AFR. Our guide on imputed interest and the IRS AFR explains the rates and the $10,000 exception in detail.

Forgiveness and bad debt

Two more situations have tax consequences. If you forgive a family loan, that is generally a gift, which brings gift-tax rules into play for you rather than income tax for the borrower. If the borrower simply never pays and the debt becomes worthless, you may be able to claim a non-business bad debt as a short-term capital loss, but only if you can show it was a genuine, documented loan that you tried to collect. In both cases, a written note is what makes the tax position defensible.

Promissory note tax checklist

Print this and keep it with your loan paperwork. It is general guidance, not tax advice, but it covers the items that most often come up at tax time.

If you are the lender

Separate every payment into interest and principal in your records
Report the interest you receive as taxable income
Charge at least the IRS Applicable Federal Rate on loans over $10,000
Keep the signed note and a payment ledger in case the IRS asks
If you forgive the loan, treat it under the gift-tax rules

If you are the borrower

Remember the borrowed principal is not taxable income to you
Do not expect to deduct principal repayments
Confirm whether your interest is deductible (mortgage or business only, usually)
Keep records of what you paid and when

General guidance, not tax or legal advice. Tax rules and thresholds change; confirm current AFR and gift-tax figures and consult a CPA for anything significant.

Create a Properly Documented Note ($7.99) → Imputed Interest & the AFR

Common mistakes to avoid

Forgetting to report interest income on a private or family loan
Charging 0% on a loan over $10,000 and triggering imputed interest
Assuming personal-loan interest is deductible (it usually is not)
Treating a forgiven loan as the borrower's income instead of a gift
Trying to deduct a bad debt with no written note to prove the loan was real