Are Kiva Loans Considered Tax Deductible?

Kiva is a microlending platform that facilitates loans from individuals to entrepreneurs around the world. Through its website, users can browse profiles of borrowers seeking funding for their businesses and choose to lend money in small increments. This structure allows the same funds to be loaned out multiple times, amplifying the impact of the initial amount.

Tax Treatment of the Loan Principal

The principal amount you lend to a borrower through Kiva is not a tax-deductible charitable contribution. The Internal Revenue Service (IRS) defines a charitable contribution as a donation to a qualified organization where the donor has no expectation of getting anything of value in return. Since a Kiva loan involves the explicit expectation of repayment, the IRS views it as a personal loan, not a gift.

This means the act of lending does not qualify for a deduction under Section 170 of the Internal Revenue Code, which governs charitable contributions. A loan is a temporary transfer of assets with a legal claim to their return, whereas a charitable donation is an irrevocable transfer of assets.

Deductibility of Optional Donations

While the loan itself is not deductible, Kiva offers lenders the opportunity to make a separate, optional donation to support its operational expenses. Kiva is a registered 501(c)(3) nonprofit organization, a status granted by the IRS to public charities. This designation is what makes contributions to the organization itself tax-deductible.

When you choose to add a donation to Kiva during the checkout process, that specific amount is considered a charitable contribution because there is no expectation of this money being returned. Lenders who make these optional donations can claim them on their tax returns, subject to the standard limitations on charitable giving.

Tax Implications of Loan Defaults

If a borrower is unable to repay a Kiva loan, the lender may have a path to a tax deduction. When a loan becomes uncollectible, the loss can be treated as a nonbusiness bad debt. This type of debt is one that was not created or acquired in connection with your trade or business, and it must be entirely worthless before it can be deducted.

A nonbusiness bad debt is reported as a short-term capital loss on Schedule D of Form 1040. Short-term capital losses are used first to offset any short-term capital gains, and then long-term capital gains. If you have more capital losses than gains, you can deduct up to $3,000 of the excess loss against your ordinary income per year ($1,500 if married filing separately).

Any remaining capital loss beyond that limit can be carried forward to future tax years. This treatment as a capital loss is subject to different rules and limitations than a charitable contribution.

Required Tax Documentation

Proper documentation is necessary to support any deductions claimed on your tax return. For optional donations to Kiva’s operational fund, the organization provides an official tax receipt. This document serves as proof of your charitable contribution and should be retained with your tax records, as it specifies the donation amount and confirms Kiva’s 501(c)(3) status.

For a loan that defaults, you must maintain records to substantiate the loss for a nonbusiness bad debt claim. This includes documentation of the original loan amount, the date it was made, and the borrower’s name. Kiva’s platform may provide information on the status of the loan, which can serve as evidence that the debt is uncollectible.