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.
If you’re wondering whether personal loans are taxable, here’s what you should know:
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:
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 pay taxes on the loan.
What is the annual gift tax exclusion? If the loan 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 2021 and 2022:
Gifts above the annual exclusion amount could be taxed at an 18% to 40% rate, depending on how much money the gifter earns. Also keep in mind that while the person giving the money away typically pays the tax, the person who receives the funds could be responsible for paying it if the donor doesn’t.
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
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
Tip: 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, you might not be able to take out a personal loan for business or education expenses from certain lenders.
Before you get a personal loan, it’s important to consider how much that loan will cost you. This way, you can be prepared for any added expenses. You can estimate how much you’ll pay for a loan using our personal loan calculator below
Enter your loan information to calculate how much you could pay
? Enter the total amount borrowed $
? Enter your annual interest rate %
? Enter the amount of time you have to repay your loan years
Total Payment $
Total Interest $
Monthly Payment $
With a $ loan, you will pay $ monthly and a total of $ in interest over the life of your loan. You will pay a total of $ over the life of the loan.
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.
For example: 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, it could be a good idea to discuss the situation with an attorney that specializes in debt or bankruptcy first.
This way, you can consider the pros and cons — including what taxes you might have to pay — beforehand.
Learn More: How Does Debt Consolidation Work?
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.
Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.
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