Are Personal Loans Taxable? What the IRS Says About Income
Personal loans generally aren't taxable because borrowed money must be repaid: The IRS doesn't consider loan proceeds income, so you typically don't need to report a personal loan on your tax return.
Forgiven debt may be taxable: If a lender cancels or forgives part of your loan, you may owe taxes on that amount unless you qualify for an exclusion, such as insolvency.
Personal loan interest usually isn't tax-deductible: Interest on loans used for personal expenses generally isn't deductible, but exceptions may apply when funds are used for business expenses, taxable investments or certain rental property costs.
Personal loans are usually not taxable because they’re borrowed money that you must repay. Since the proceeds aren’t considered income, you generally don’t need to report a personal loan on your tax return.
The main exception is canceled or forgiven debt, which may be taxable. Personal loan interest may also be deductible in limited cases when the money is used for business, taxable investments or certain rental property expenses.
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When Could a Personal Loan Be Taxable?
A personal loan becomes taxable mainly when some or all of the debt is canceled or forgiven. Other situations, such as certain family or below-market loans, may also have tax implications.
Canceled or forgiven debt: If part of your loan is forgiven, the canceled amount may be treated as taxable income.
Form 1099-C: If a lender cancels $600 or more of debt, you may receive Form 1099-C. However, canceled debt can still be taxable even if you don't receive the form.
Family or below-market loans: Loans from friends or family members that charge no interest — or interest below the IRS applicable federal rate — may have tax consequences.
What Is Cancellation of Debt Income?
Cancellation of debt income is the amount a lender forgives instead of requiring you to repay. The IRS generally treats that amount as taxable income unless an exception or exclusion applies.
Check whether your lender canceled or forgave debt of $600 or more.
Look for Form 1099-C from your lender.
Determine whether an exception or exclusion applies.
- Report the taxable amount on your return if required.
Is Personal Loan Interest Tax-Deductible?
Interest on a personal loan generally isn't tax-deductible when the money is used for personal expenses, such as paying bills, taking a vacation or consolidating debt.
There are some exceptions, however:
Business expenses: If you use the loan for business expenses, such as if you're a self-employed individual and weren't able to qualify for a business loan, the interest may be tax-deductible.
Taxable investments: If you borrow money specifically to invest, it may qualify for a deduction.
Rental property: Interest may also be deductible if the loan proceeds are used for qualifying rental property expenses.
Do You Have To Report a Personal Loan on Your Taxes?
Usually, no. You don’t report the proceeds of a standard personal loan because the money must be repaid.
You may need to report an amount when:
Some or all of the debt is canceled or forgiven.
You receive Form 1099-C.
An interest deduction applies because the funds were used for an eligible business, investment or rental purpose.
Receiving Form 1099-C doesn’t necessarily mean the entire amount is taxable. Review the form for accuracy and determine whether an exclusion, such as insolvency, applies before filing.
If you’re considering a personal loan to pay taxes, make sure you understand how the loan and any canceled debt could affect your tax situation.
Personal Loans vs. Other Loan Types
Before comparing tax rules, it helps to understand what a personal loan is and how it differs from other types of borrowing.
Loan type | Taxable when received? | Interest deductible? |
|---|---|---|
Personal loan | No | Usually not |
Student loan | No | Sometimes, up to $2,500 per year |
Mortgage loan | No | Sometimes, if itemizing |
Auto loan | No | Usually not |
Business loan | No | Often yes, if used for business |
Good To Know
Student loan forgiveness has separate tax rules. For debt cancelled after Dec. 31, 205, forgiveness through income-driven repayment (IDR) plans is generally subject to federal income tax, while certain programs and discharges may remain tax-free.
How To Avoid Tax Surprises With Personal Loans
No one wants a surprise tax burden, and you can minimize the chances of that happening by keeping thorough records of your personal loan, including the initial agreement and terms, as well as your history of payments.
Always ask for written agreements, even if you get a loan from a friend or family member rather than going through a traditional lender.
If your loan debt is settled, you can contact the lender for a 1099-C form or if the information on the form is incorrect.
If you're unsure whether your personal loan qualifies for deductions or how to handle loan forgiveness on your tax return, speak with a tax advisor to get personalized advice.
For family loans, keep these in mind:
Write everything down.
Charge some interest.
Keep a payment schedule.
Hold on to your proof of payment.
Bottom Line
Personal loans generally aren't taxable because they must be repaid.
Canceled debt may be taxable unless you qualify for an IRS exclusion.
Personal loan interest usually isn't deductible unless the funds were used for business, investments or certain rental property expenses.
Keep detailed loan records and consult a tax advisor if you're unsure how your situation should be reported.
Key Terms
Personal loan: An unsecured installment loan from a bank, credit union or online lender that you repay in fixed monthly payments.
Canceled debt: The portion of a loan that a lender forgives or discharges rather than requiring repayment. The IRS generally treats canceled debt as ordinary income in the year it's canceled.
Form 1099-C: A tax form a lender files — and sends to the borrower — when it cancels $600 or more of debt. You use it to report any taxable canceled-debt amount on your return.
Taxable income: Money the IRS considers subject to federal income tax. Borrowed funds aren't taxable, but canceled debt and certain interest arrangements may be.
Debt forgiveness: When a lender releases a borrower from the obligation to repay all or part of a loan. The forgiven amount is usually treated as taxable income unless an exclusion applies.
Insolvency: A financial condition in which your total debts exceed the fair market value of your total assets. Canceled debt is excluded from taxable income to the extent you're insolvent at the time of cancellation.
Below-market loan: A loan — often from a family member or friend — that charges interest below the IRS applicable federal rate.
Sources
Cornell Law School: 26 U.S. Code § 7872 — Treatment of Loans With Below-Market Interest Rates
Photo Credit: Sneksy / iStock.com
Parts of this article were created with AI assistance. MoneyLion editors reviewed, fact-checked and edited the final version and are responsible for its accuracy.
FAQs
No, you don't need to report a personal loan on your taxes unless part of the loan debt is canceled or forgiven.
No. Loan forgiveness isn't always taxable. For student debt cancelled after Dec. 31, 2025, forgiveness through IDR plans is generally federally taxable again. However, Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness and certain death or total and permanent disability discharges may remain tax-free under federal law.
No, you can't write off personal loan interest in this situation because the IRS considers it personal interest that doesn't qualify for a deduction.
Usually not if it's a legitimate loan that you're expected to repay. However, interest-free or below-market family loans can have separate tax consequences, so it's important to document the loan terms and repayment agreement.
Yes, you might still owe taxes, even if you didn't receive a form, because the IRS can tax it without one.
Potentially. If you use personal loan proceeds for qualifying business expenses, some or all of the interest may be deductible. Keep clear records tracing the borrowed money to its business use.
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