The regulatory landscape governing the taxation of loans in the United States is primarily defined by Congress through the Internal Revenue Code and further elucidated by the Treasury Department’s Treasury Regulations, serving as a comprehensive framework for understanding the intricate tax implications associated with loans.

It is crucial to recognize that a loan itself does not constitute gross income for the borrower, as the obligation to repay does not result in a direct increase in the borrower’s wealth.  This principle is grounded in the notion that the conversion of one asset (cash) into another (a promise of repayment) does not trigger a taxable event.  Deductions, typically disallowed when converting assets into new forms, further reinforce this perspective. 

Importantly, the lender cannot deduct the loan amount from their gross income, aligning with the rationale that the transformation of cash into a promise of repayment does not warrant a deduction.  Conversely, the repayment of the loan by the borrower also does not qualify as gross income for the lender, as the promise of repayment is effectively converted back into cash without resulting in an increase in the lender’s wealth.

However, the dynamics change when considering interest payments. Interest paid to the lender becomes part of the lender’s gross income, representing compensation for the utilization of the lender’s money or property and constituting a form of profit or wealth accession for the lender.  This interest income is attributed to lenders even in cases where a minimum interest amount is not charged.

Crucially, interest paid to the lender may be deductible for the borrower, with a general distinction between interest related to business activities being deductible and interest on personal loans typically being non-deductible. Notably, a significant exception to this rule is the deductibility of interest paid on a home mortgage.  This exception reflects the recognition of the unique nature of home mortgages within the broader context of tax treatment for interest payments.Loans​