Do I Have to Pay Taxes on a Personal Loan?

When you take out a personal loan, you don't owe income tax on the money you borrow — a loan is not income because you're obligated to repay it, and the IRS doesn't tax borrowed funds. However, if your lender later forgives or cancels part or all of the loan, the forgiven amount may be treated as cancellation of debt income, which is taxable in most situations. You'll typically receive a Form 1099-C from the lender showing the amount cancelled, and you'll need to include it in your income unless an exception applies — such as the insolvency exclusion (if your debts exceeded your assets immediately before the cancellation) or a bankruptcy discharge. On the interest side, personal loan interest is generally not deductible (unlike mortgage interest or student loan interest), though interest on a loan used for business purposes may be deductible as a business expense. The key rule: borrowed money in isn't taxable, but forgiven debt usually is.