If you’re looking at the Donut App, here’s what you need to know about taxes and whether the Donut App is legit.
What is the Donut app?
Donut is an online investing platform that offers a higher yield than savings accounts. Donut converts your investments into digital dollars. Partner lenders then lend out your money and give you a portion of the interest.
Donut’s digital dollar investments are in stablecoins. Stablecoins are similar to Bitcoin but have a fixed value instead of a fluctuating price.
How does Donut work?
With the Donut App, you invest and withdraw traditional U.S. dollars. The app invests in cryptocurrency and pays you interest. The interest is also in traditional dollars.
The setup is similar to a bank account where the bank makes money off of your deposits and pays you interest to encourage deposits. You can make one-time transfers, schedule recurring transfers, or let Donut round up your purchases and invest your spare change.
You can invest your money into multiple plans. You can choose between a lower guaranteed rate or a variable rate that may give you higher returns.
What are the risks of investing in Donut?
There are several risks of investing in Donut. This does not mean that you shouldn’t invest in Donut, but you do need to carefully consider these risks before making any decisions.
- Donut is not FDIC-insured. FDIC insurance guarantees that your bank deposits can’t lose value if something happens to your bank. Donut is not a Bank.
- Donut is not SIPC-insured. SIPC insurance prevents you from losing cash and securities in a brokerage account if something happens to your broker.
- Donut does not post a prospectus. A prospectus is a detailed document that outlines the investment strategy and possible risks of an investment offering.
- Donut does not say they are registered with the SEC. Registered investment companies are subject to strict oversight that can help protect investors.
What protections does Donut offer?
Donut says its lenders are highly vetted, subject to routine audits, and follow strict security protocols.
Donut also says the loans are backed by 100% to 200% collateral. What this means is that for someone to borrow $1,000, they need to have $1,000 to $2,000 in an account connected to the lender.
What taxes do you pay on Donut investments?
Donut pays interest on your investments. Unlike taxes for investments like Fundrise, you are not buying or selling at a loss. Therefore, you should report the income as interest income on Schedule B of your Form 1040 each year.
Are Donut earnings interest or capital gains?
Donut earnings should generally be treated as interest. That’s because of how you make money.
You’re lending your money to Donut, and Donut is then lending money or Ethereum to other people. While you have a risk of losing money, in theory, you’re supposed to get 100% of your investment back unless something goes wrong. You also don’t have a chance of increasing your investment — Donut keeps any gains over the interest.
Since you’re getting a regular payment at a fixed rate, the income from Donut counts as interest.
Capital gains are for when you buy and sell an asset. When the IRS says cryptocurrency is property, it’s talking about people who buy and sell coins.
When you buy Ethereum and sell it at a higher price, you have to pay capital gains taxes. The difference with Donut is that you’re not buying and selling — you’re lending to someone else.
This is similar to how bank deposits work. If you deposit money that the bank uses to issue mortgages, you don’t pay capital gains taxes just because the mortgage might be used to buy real property.
You aren’t the one buying the property. You’re lending and getting interest.
Do Donut users need to check the Form 1040 box that says “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?”
Donut users generally don’t need to check the cryptocurrency box on 1040. According to IRS guidelines, you don’t need to check the box if you:
- Purchase virtual currency using real currency, including purchases using real currency electronic platforms such as PayPal and Venmo.
- Hold virtual currency in your own wallet or account.
More fundamentally, you can also say you’re not actually purchasing or holding the cryptocurrency. You invest dollars, get interest in dollars, and take out your original dollars.
That’s also why you don’t have to check the cryptocurrency box for receiving virtual currency as payment or for selling virtual currency. You’re not receiving virtual currency, and you’re also not selling it.
Does Donut issue tax forms?
Donut does not issue tax forms. I’m really not sure why they seem to think they’re exempt from doing so.
In my view, under current IRS guidelines for cryptocurrency, they should be issuing a 1099-INT if you earned at least $10 in interest during the year. Even if you don’t get a 1099, you still need to report your interest income.
They do provide instructions for creating your own Form 1099-INT to enter on your tax software.
- Add up your interest payments during the year using your account statements or tax summary in your app.
- Enter the Donut address Donut, Inc., 6121 Sunset Boulevard, Los Angeles, CA 90028, United States
- Enter the Donut TIN/EIN 61-1929355.
If you’re not using tax software that asks for your 1099-INTs, you can enter the interest on Schedule B.
Why do I have to pay taxes if I didn’t get a tax form?
The IRS requires you to report all income even if you don’t get a 1099. Getting a 1099 isn’t what makes your income taxable.
The IRS uses 1099s to help find out who isn’t reporting their taxes. However, even if you’re under the minimum income to get a 1099 or a business doesn’t issue a 1099 when it should, you still have to report your income.