Is the Donut App Legit?

The Donut app is a digital dollar investment platform. There are several things you should know before considering an investment.

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?

Donut works similarly to a savings account or investment account. 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 documents that outlines the investment strategy and possible risks of an investment offering.
  • Donut does not say they are reigstered 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. 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.

Donut appears to be saying it appears that the IRS hasn’t clearly said that it needs to issue tax forms. On the same page, they give instructions to create a substitute 1099-INT. 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.

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