Credible Takeaways
- Personal loans are generally not considered taxable income because you have to pay back the money.
- However, if your debt is forgiven, you may receive a Form 1099-C and have to report the canceled amount on your tax return.
- In general, personal loans are not considered tax deductible.
- The interest on a personal loan used for business purposes may be tax deductible.
If you’re taking out a personal loan (or have already gotten one), you might wonder if it will be considered taxable income. The good news is that funds you have to pay back — such as those from a personal loan — typically aren’t considered income, and so aren’t subject to income tax.
However, if some or all your loan is canceled, the amount that’s discharged could be subject to federal income taxes.
Are personal loans treated as taxable income?
Generally, no — in most cases, you don’t have to report personal loan funds on your taxes. Unlike sources of income that you keep (such as your salary or wages), the money borrowed with a personal loan isn’t considered income. Instead, this money is a debt that you’ll have to repay in full to the lender.
The one exception is if some or all your loan is forgiven or canceled — for example, if you settle the debt or have it wiped clean through bankruptcy. In this case, you might get a Form 1099-C from the lender showing how much of the debt was canceled, which you’ll have to report in your tax return.
Learn More: Types of Personal Loans
What is taxable income?
Taxable income is essentially money that you earn and keep, which is used to determine the taxes that you owe to the government. Common sources of taxable income include:
- Salary
- Wages
- Freelance earnings
- Business earnings
- Tips
- Commissions
- Bonuses
- Investment earnings
At the end of each year, you might receive tax statements from these sources of income — for example, you could get a W-2 from your employer or a 1099 form from a freelance client.
These documents can help you figure out how much you owe in taxes or how much you should get as a refund.
Tip
Taking advantage of tax deductions could help you lower your taxable income, reduce your tax bill, and increase the size of your tax refund — if you’re due one.
What if you received a loan from a family member or friend?
If a friend or family member lends you money, it typically won’t be considered taxable income. However, there could be tax implications for the person lending you the money if they don’t charge interest on the loan or if you don’t pay the money back.
Depending on the size of the loan, the IRS might consider the unpaid amount or unpaid interest as a gift — which means the person who lent the money would have to file a gift tax form and potentially, though unlikely, pay taxes on the amount.
What is the annual gift tax exclusion? If a loan that isn't paid back falls under a certain amount, a gift tax form isn’t required — this is known as the gift tax exclusion. Here are the exclusion amounts for tax years 2023 and 2024:
- 2023: $17,000
- 2024: $18,000
For gifts made above the annual exclusion amount, the giver should file a gift tax return with the IRS. The amount over the annual exclusion will be deducted from their lifetime gift tax exclusion amount. As of 2024, this was $13.61 million.
The IRS also has some exceptions where gifts aren’t taxable, even if the value exceeds the annual gift tax exclusion — including gifts:
- Received for tuition or medical expenses
- To a spouse
- To a political organization
- To qualifying charities
Learn More: What is Peer-to-Peer Lending?
Are personal loans tax deductible?
Unlike the interest on some loans (such as student loans), interest paid on personal loans generally isn’t tax deductible unless you use the loan proceeds in specific ways. For example, you might be able to deduct this interest from your taxes if you use the funds solely for:
- Qualified higher education expenses
- Business expenses
- Taxable investments
Be sure to keep careful records of how you use the funds if you decide to take out a personal loan for one of these purposes. While you can use personal loan funds to cover multiple expenses, any interest that you try to deduct must only be from one of these qualified expenses.
Additionally, keep in mind that while you can generally use a personal loan to cover almost any personal expense, some personal loan lenders limit the ways you can use their loans. For example, few lenders offer personal loans for business expenses and few-to-none will allow you to pay for education expenses with a personal loan.
Learn More: Are Personal Loans Tax Deductible?
Tax implications if your personal loan is forgiven or canceled
In some situations, lenders will forgive or cancel a debt if they’re unable to collect payments or you negotiate a settlement for less than what you owe. If you had a personal loan that was discharged, the amount you didn’t end up paying could be considered income — meaning it will be subject to taxes.
Say you owe $20,000 on a personal loan that you’re unable to pay in full, and the debt collector is willing to accept $15,000 to settle the account.
The difference between what you owe and what you actually pay — $5,000 in this case — could be taxable. The lender might send you Form 1099-C showing how much debt was forgiven, and you’d have to file this document with your tax return.
Exceptions to the tax rules
As with most IRS guidelines, there are also some exceptions to the rules concerning forgiven or canceled debt. For example, the IRS doesn’t consider any of the following as canceled debt that would be subject to taxes:
- Amounts canceled as gifts or inheritances
- Certain qualified student loans canceled after working in a certain field for a specific period of time
- Certain education loan repayment or forgiveness programs offered to help provide health services in specific areas
- Amounts of canceled debt that would be deductible if you paid it
- Qualified purchase price deduction given by the seller of a property to the buyer
- Any amounts discharged from federal, private, or educational student loans
Additionally, you might not have to include canceled debt in your gross income for tax purposes if your debt was:
- Canceled under Title 11 bankruptcy
- Canceled to the extent insolvent
- Cancellation of qualified farm indebtedness
- Cancellation of qualified real property business indebtedness
- Cancellation of qualified principal residence indebtedness that’s discharged subject to an arrangement entered into and evidenced in writing before Jan. 1, 2026
Tip
If you’re thinking about negotiating a settlement with a personal loan lender, consider discussing it with an attorney who specializes in debt or bankruptcy first. This way, you can consider the pros and cons, like taxes you may have to pay, beforehand.
Learn More: Debt Consolidation vs Bankruptcy
When to consider a personal loan
You can use a personal loan to cover almost any personal expense. For example, if you need to consolidate debt, pay for a medical procedure, or cover an unexpected expense, a personal loan could be a helpful option.
Keep in mind
Personal loan funds typically aren’t considered taxable income unless some or all of the loan is forgiven or canceled.
If you decide to take out a personal loan, be sure to shop around and consider your options from as many lenders as possible to find the right loan for you.
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