What sort of tax treatment does a charitable micro-lending loan incur?
So, a friend of mine has encouraged me to look at Kiva (http://kiva.org ) which does microlending and has a big fat legal agreement that says (among other things)
1.3 Tax Deductibility. You understand that Kiva is a non-profit public benefit corporation. Kiva has received exemption with the Internal Revenue Service as an organization that qualifies as a public charity under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended from time to time. You acknowledge, however, that because you are making a Loan and not donating any money, you are not eligible to receive a tax deduction as might otherwise be available in connection with a charitable contribution to a tax-exempt public charity. You also understand that you are solely responsible for determining the proper tax treatment for any Loan you make through the Website and the Program. Kiva has not and will not provide any tax or legal advice to you in connection with any Loan you might make. This Agreement does not attempt to define the tax implications of participating in the Program. If you participate in the Program, you should consult with your own accountants, tax advisors and legal advisors.
So there are two kinds of tax treatment I'm curious about:
- Is there any potential to have the IRS accuse you of incurring a tax liability in relation to this lending?
- What sort of capital losses does the IRS allow you to deduct in the event of a charitable loan gone sour? Has there been any guidance issued on this topic?
EDIT EDIT EDIT EDIT I used the term charitable loan specifically because you cannot earn a profit from a Kiva loan .
Loans made via the Website are philanthropic in nature with no offered rate of return and, as such, are not intended as, and cannot be considered as, an investment in a financial instrument or security.
I'm aware that you can't deduct the principal of the loan as a charitable donation. I'm certainly not going to try and deduct the opportunity cost of making the loan. But it is charity, you can't make a profit off it, and you will lose out on interest on the money you could have made (and may incur principal losses as well). I am specifically interested in whether there's any background information on tax treatment of "lending money you can lose but not make interest off of", or if there's some other quirk of the tax structure which could make you liable for taxes even if you don't get paid interest.
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