Blended Annual Rates for Demand Loans: Forgone Interest Rules

The IRS blended annual rate for demand loans is 4.22% for the 2025 tax year, published in Revenue Ruling 2025-13.¹ It is the single interest rate the IRS tells you to use when calculating imputed interest on a below-market demand loan under Internal Revenue Code Section 7872, so you don’t have to track and weight the monthly Applicable Federal Rate across the year.² The 2026 rate has not been published as of early 2026 and will likely appear in a mid-year revenue ruling, applied retroactively to January 1.

For context, the 2024 rate was 5.03%, published in Revenue Ruling 2024-13.³ Each year’s figure appears in Table 6 of the mid-year revenue ruling, posted to the IRS Applicable Federal Rates page.⁴

When the Rate Actually Applies

The blended annual rate only governs loans that are both below-market and demand loans. If either piece is missing, it isn’t the right rate.

A loan is below-market when its stated interest rate falls below the Applicable Federal Rate for the month the loan was made. The AFR is a minimum rate the IRS sets each month based on average yields of U.S. Treasury securities.⁴ Charging less than that signals to the IRS that part of the transaction is really a gift, a dividend, or disguised compensation.²

A demand loan is any loan the lender can call for full repayment at any time. The statutory definition also captures loans tied to the borrower’s future performance of services with nontransferable benefits, and any loan with an indefinite maturity.⁵ That indefinite-maturity catch-all pulls in many informal family loans. If you lent a relative money with a vague understanding that they’d pay you back eventually, the IRS likely treats it as a demand loan.

Term loans with fixed maturity dates work differently. Forgone interest on a below-market term loan is treated as original issue discount imputed at origination, not recomputed each year.⁵ The blended annual rate has no role in that calculation.

Calculating Forgone Interest

Once you have the published rate, the math is short. Four steps cover any below-market demand loan that doesn’t qualify for a safe harbor.

Find the Published Rate

Pull the rate for the tax year you’re reporting. For 2025, it’s 4.22%.¹ For 2026, wait for the mid-year revenue ruling. Only the officially published figure produces a correct calculation.

Determine the Average Outstanding Balance

Calculate the average principal balance for the time the loan was outstanding during the year. A balance that never changed is simple arithmetic. Partial repayments or additional advances require a daily or monthly weighted average, so keep records of every principal change on both sides.

Multiply the Rate by the Balance

Multiply the blended annual rate by the average balance. The product is the total interest the IRS deems should have been charged. At the 2025 rate of 4.22%, a $100,000 loan generates $4,220 in imputed interest.

Subtract Any Interest Actually Paid

Subtract any interest the borrower actually paid during the calendar year. What remains is the forgone interest, and it drives the deemed transfer and repayment that Section 7872 treats as occurring on December 31.² If paid interest equals or exceeds the rate’s amount, there’s no forgone interest to report.

How the Forgone Interest Is Taxed

The IRS treats forgone interest as two simultaneous year-end transactions. The lender is deemed to transfer the forgone amount to the borrower; the borrower is deemed to pay it right back as interest.² The first leg takes its character from the relationship:

Corporation to shareholder: the deemed transfer is a dividend distribution.
Employer to employee: the deemed transfer is additional compensation income.
Family member to family member: the deemed transfer is a gift.

Either way, the lender reports the deemed interest payment as interest income, typically on Schedule B of Form 1040.⁶ No cash actually moves, but the IRS treats the deemed repayment as real interest income.

Whether the borrower can deduct the deemed interest depends on how the loan proceeds were used. Investment use may be deductible as investment interest expense, subject to the limitations under IRC 163(d). Business use may be deductible as a business expense. Personal use produces no deduction.

When the forgone interest is a dividend from a corporation to a shareholder, the corporation reports it on Form 1099-DIV if the amount meets the $10 reporting threshold.⁷ For gift loans, the deemed gift may require a Form 709. The federal annual gift tax exclusion for 2026 is $19,000 per recipient.⁸ If the imputed interest plus any other gifts to the same person exceeds $19,000 in a year, the lender files Form 709 by April 15 of the following year.⁹ On most family loans the imputed interest sits far below that line, though large zero-interest loans can push it higher than people expect.

Exceptions That Can Zero Out the Calculation

The $10,000 De Minimis Rule

Section 7872 provides a safe harbor for small loans. If the aggregate outstanding balance of all loans between the same lender and borrower stays at or below $10,000, the imputed interest rules don’t apply.² This covers gift loans, compensation-related loans, and corporate-shareholder loans.

Two limits narrow it. The ceiling aggregates across all loans between the same two people, so splitting a $15,000 loan into two notes doesn’t help. And the exception disappears entirely for gift loans directly used to buy or carry income-producing assets, and for compensation or corporate-shareholder loans where tax avoidance is a principal purpose.⁵

The $100,000 Gift Loan Cap

A more generous rule applies only to gift loans between individuals. When the aggregate balance of gift loans between the lender and borrower doesn’t exceed $100,000, imputed interest for income tax purposes is capped at the borrower’s net investment income for the year.¹⁰ A borrower with little or no investment income owes imputed interest on little or nothing.

A built-in floor makes it more favorable still: if the borrower’s net investment income for the year is $1,000 or less, it’s treated as zero, so there’s no imputed interest at all.¹⁰ A parent lending $80,000 to an adult child with minimal savings and no brokerage account effectively owes nothing under this cap.

Net investment income here uses the definition in IRC 163(d)(4): interest, dividends, annuities, royalties, and net capital gains from investment property, reduced by related expenses, and reaching certain deferred payment obligations such as U.S. savings bonds and market discount bonds.

The cap vanishes the day aggregate loans cross $100,000, after which the full imputed interest rules apply with no investment-income ceiling. The $100,000 figure is fixed in the statute and is not indexed for inflation.⁵ As with the de minimis rule, the cap drops away if a principal purpose of the interest arrangement is federal tax avoidance.

Make Sure It’s Treated as a Loan at All

None of this matters if the IRS decides your “loan” was never really a loan. Related-party transfers draw scrutiny, and the IRS looks at substance over label. At a minimum, keep a written promissory note signed by both sides stating the principal, interest rate (even if zero), repayment or demand terms, and date. Beyond paperwork, the IRS asks whether the parties behaved like a lender and borrower: whether payments actually happened, whether the borrower could reasonably repay when the loan was made, whether missed payments got pursued, and whether both sides kept records.

If the IRS reclassifies a purported loan as a gift, the entire principal becomes a taxable transfer, not just the imputed interest. For corporate-shareholder loans, reclassification can turn the full amount into a dividend or constructive distribution. Those stakes dwarf the modest imputed interest the blended annual rate produces.

1
Internal Revenue Service. Rev. Rul. 2025-13
2
Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
3
Internal Revenue Service. Internal Revenue Bulletin 2024-28
4
Internal Revenue Service. Applicable Federal Rates (AFRs) Rulings
5
Office of the Law Revision Counsel. 26 US Code 7872 – Treatment of Loans With Below-Market Interest Rates
6
Internal Revenue Service. About Schedule B (Form 1040)
7
Internal Revenue Service. Instructions for Form 1099-DIV
8
Internal Revenue Service. What’s New — Estate and Gift Tax
9
Internal Revenue Service. Instructions for Form 709 (2025)
10
GovInfo. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates – Section: Special Rules for Gift Loans