Tax issue of Paid back Principal plus appreciation linked to equity index, eg gold

Asked over 2 years ago - Fairport, NY

What is the IRS Tax treatment of a loan principal paid after 3 years with appreciation :
A person A loaned Principal P to B to be paid after 3 years with interest I, paid quarterly, The interest i was reported at end of year on 1099-interest and taxed accordingly.
The loan , Promissory note stipulates that its principal value is tagged/indexed to the price of Gold at the outset, and would be paid accordingly, ie if Gold is up by 20% the principal is paid back with 20% increase, and the opposite is true, ie if Gold is down by 20%, the principal is paid back with 20% decrease, so principal value is at risk. Fortunately it did increase..
Is it to be reported as Long Term Cap Gain on sched-D ? Is there any IRS ruling/opinion in that regard? -link appreciated. Thanks , Abud.

Additional information

Attorney answers (1)

  1. Bruce Givner

    Contributor Level 19

    Answered . There is no deduction for the repayment of principal on a loan. (Arguably there is an exception for ESOP loans.) What you have described is not a mere loan: it is a loan which might be characterized as either an adjustable interest element or as an equity kicker. The issue is whether the arrangement will be characterized as a loan or as a partnership. If it is characterized as a loan, then the borrower wil be entitled to deduct the entire amount of interest. If it is characterized as a partnership, then there will be no interest deduction. The analysis of the arrngement requires a review of the actual documents.

Related Topics

Employee Stock Ownership Plans

An employee stock ownership plan (ESOP) is a type of retirement plan that gives workers an ownership interest in the business.

Robert Elliott Brown

ESOPs: Advantages and Disadvantages

What is the Principal Reason to Use an ESOP? One of the problems that entrepreneurs and family business owners face is that there is no established market for their shares. This means... more

Can't find what you're looking for? Ask a Lawyer

Get free answers from experienced attorneys.


Ask now

23,969 answers this week

2,906 attorneys answering

Ask a Lawyer

Get answers from top-rated lawyers.

  • It's FREE
  • It's easy
  • It's anonymous

23,969 answers this week

2,906 attorneys answering