Do I Have to Report a Personal Loan on My Taxes?

Receiving a personal loan does not trigger a tax reporting requirement. The money you borrow is not considered income because there is an obligation to repay the funds, which distinguishes it from taxable income like wages or investment earnings. For tax purposes, a personal loan is a transaction where you receive funds for personal use, such as consolidating debt or covering a major expense, rather than for business or investment activities.

Tax Rules for the Borrower

The principal amount of a personal loan is not included in your gross income for tax purposes. Therefore, you do not need to report the loan amount you receive on your annual tax return.

While the loan itself is not taxed, the rules for deducting interest payments are specific. For a personal loan used for personal expenses, the interest you pay is not tax-deductible. This stands in contrast to other types of debt, such as qualified mortgage interest or student loan interest, which may offer tax deductions under certain conditions.

Tax Rules for the Lender

The tax implications for the lender are different from those for the borrower. Any interest received from a personal loan is considered taxable income and must be reported to the IRS. If the interest income is more than $1,500, it is reported on Schedule B (Form 1040), Interest and Ordinary Dividends.

Specific rules apply to loans made with no interest or a very low interest rate, often seen in arrangements between family members. These are known as below-market loans. In these situations, the IRS may apply “imputed interest,” meaning the lender may be required to report and pay taxes on interest income they did not actually receive. The amount is calculated using the Applicable Federal Rates (AFRs), which are minimum interest rates published monthly by the IRS.

The purpose of the imputed interest rules is to prevent loans from being used as tax-free gifts. If the interest rate charged is less than the relevant AFR, the lender must calculate the “forgone interest”—the difference between the AFR interest and the interest actually paid—and report it as taxable income. An exception for gift loans between individuals exists: these rules do not apply if the total outstanding loans between the lender and borrower are $10,000 or less, provided the loan is not used to purchase income-producing assets.

When a Loan is Canceled or Forgiven

A borrower’s tax situation changes if a lender cancels or forgives a portion of the loan. When a debt is discharged for less than the amount owed, the forgiven amount is treated as taxable income for the borrower. This is referred to as Cancellation of Debt (COD) income because the borrower has received an economic benefit.

Lenders who forgive a debt of $600 or more are required to issue Form 1099-C, Cancellation of Debt, to both the borrower and the IRS. This form details the amount of debt that was canceled. The borrower is then responsible for reporting this amount as ordinary income on their tax return, on Schedule 1 (Form 1040), under “Other income.”

Receiving a Form 1099-C does not automatically mean the amount is taxable, as the tax code provides several exclusions. For instance, debt discharged in a Title 11 bankruptcy case is not taxable. Another exclusion applies if the borrower was insolvent—meaning their total liabilities exceeded the fair market value of their total assets—immediately before the debt was canceled. To claim an exclusion, the taxpayer must file Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness.

Distinguishing a Loan from a Gift

The distinction between a loan and a gift is important, as the tax treatment for each is different. For a transaction to be recognized as a loan by the IRS, there must be clear evidence of a debtor-creditor relationship. This means there was a genuine expectation of repayment. Factors that substantiate a loan include a written agreement, such as a promissory note, a specified interest rate, and a fixed repayment schedule.

In contrast, a gift is a transfer of money or property made without the expectation of receiving anything of value in return. For the recipient, a gift is not considered taxable income and does not need to be reported. The tax consequences of a gift fall on the giver through the federal gift tax, but due to the annual gift tax exclusion—$19,000 per recipient for 2025—most gifts do not result in any tax payment.

If a transaction between family members is not formally documented as a loan, the IRS may reclassify it as a gift. This is particularly true for interest-free or below-market loans, where the forgone interest may be treated as a gift from the lender to the borrower each year. Maintaining clear documentation is the most effective way to ensure the transaction is treated as a loan.