The IRS applicable federal rates for December 2025, published in Revenue Ruling 2025-24, are 3.66 percent short-term, 3.79 percent mid-term, and 4.55 percent long-term, all stated at annual compounding.1Internal Revenue Service. Rev. Rul. 2025-24 These are the minimum interest rates you can charge on a private loan this month without triggering imputed interest or gift tax consequences. Which tier applies depends on how long the borrower has to repay.
December 2025 Rates at Every Compounding Frequency
Revenue Ruling 2025-24 publishes each tier at four compounding intervals. The stated rate drops slightly as compounding gets more frequent because a lower stated rate at monthly compounding produces the same effective yield as a higher rate at annual compounding. Match the column to the compounding language in your promissory note.1Internal Revenue Service. Rev. Rul. 2025-24
- Short-term: 3.66% annual, 3.63% semiannual, 3.61% quarterly, 3.60% monthly
- Mid-term: 3.79% annual, 3.75% semiannual, 3.73% quarterly, 3.72% monthly
- Long-term: 4.55% annual, 4.50% semiannual, 4.47% quarterly, 4.46% monthly
The ruling also publishes 110%, 120%, 130%, 150%, and 175% multiples of these rates for specific tax code provisions. Most private loans only use the base row above.
Which Tier Applies to Your Loan
The tiers key off the loan’s maturity, not what the parties call it:2Office of the Law Revision Counsel. 26 U.S. Code 1274
- Short-term covers loans of three years or less.
- Mid-term covers loans over three years and up to nine years.
- Long-term covers anything beyond nine years.
Pick the wrong tier and you’ve undercharged interest for the life of the loan. On a seven-year note written at the short-term rate, the IRS can impute the difference every year until the note matures.
Term Loans vs. Demand Loans
A term loan has a fixed repayment date. The AFR in effect on the day the loan is made locks in for the entire term, and the statute defaults term loans to semiannual compounding.3Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates A five-year loan closed in December 2025 stays at 3.79 percent mid-term (semiannual: 3.75 percent) for all five years, regardless of where rates go afterward.
A demand loan has no fixed maturity and can be called at any time. Demand loans use the short-term AFR, retested each period as rates move.3Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates The minimum interest requirement on a demand loan therefore fluctuates from month to month.
Installment Sales of Property
If you’re selling property on an installment basis, a separate rule lets you use the lowest AFR from a three-month window: the month of the binding written contract and the two months before it.2Office of the Law Revision Counsel. 26 U.S. Code 1274 Before signing a family sale, pull the prior two months’ rulings and compare.
The Section 7520 Rate for December 2025
The Section 7520 rate equals 120 percent of the annual mid-term AFR, rounded to the nearest two-tenths of one percent.4Internal Revenue Service. Section 7520 Interest Rates For December 2025, that comes out to 4.6 percent (120% of 3.79% is 4.548%, rounded up).5Internal Revenue Service. Section 7520 Interest Rates for Prior Years
This is the figure used to value annuities, life estates, remainder interests, and certain trust transfers for gift and estate tax purposes. If you’re funding a grantor retained annuity trust or a charitable lead trust this month, 4.6 percent is the number that drives the valuation.
When the AFR Doesn’t Apply: The $10,000 Threshold
Not every family loan has to meet the AFR. If the total outstanding balance between you and an individual borrower never exceeds $10,000, the below-market interest rules generally don’t apply.3Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates You can lend a sibling $10,000 at zero interest without imputed interest or gift tax consequences.
The exception disappears if the borrower uses the money to buy or carry income-producing assets like stocks, a rental property, or a business interest.3Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates Helping cover medical bills is fine. Seeding a brokerage account is not.
A parallel $10,000 de minimis rule exists for employer-employee and corporation-shareholder loans, but that version is stricter: it doesn’t apply if tax avoidance is one of the principal purposes of the arrangement.
What Happens If You Charge Less Than the AFR
When a loan carries interest below the applicable AFR, the IRS treats the shortfall as “forgone interest.” On a gift loan, the forgone interest is deemed transferred from lender to borrower (a gift) and then deemed paid back to the lender as interest income.3Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates Two tax events, no cash actually moving for the interest.
If the deemed gift for the year exceeds the annual gift tax exclusion ($19,000 per recipient for 2026), the lender has to file a gift tax return.6Internal Revenue Service. What’s New – Estate and Gift Tax The numbers scale quickly on larger balances. A $1 million interest-free demand loan at the December 2025 short-term rate of 3.66 percent generates $36,600 in imputed interest for the year, well past the exclusion.
Unreported imputed interest can also draw the accuracy-related penalty under Section 6662, which adds 20 percent of the underpaid tax when the shortfall results from negligence or a substantial understatement.7Office of the Law Revision Counsel. 26 U.S. Code 6662
Documenting and Reporting the Loan
A lender who receives (or is deemed to receive) at least $10 of interest in a year has to file Form 1099-INT.8Internal Revenue Service. About Form 1099-INT, Interest Income That covers both actual interest collected and imputed interest on a below-market loan. The interest goes on the lender’s return as ordinary income whether or not the 1099 was filed.
A written promissory note is what separates a loan from a disguised gift in an audit. The note should state the principal, the interest rate (at or above the correct AFR row for the term and compounding frequency), the repayment schedule, and the compounding method. Keep records of the actual payments made against it.
Finding and Locking In the Right Rate
The IRS keeps every AFR revenue ruling on its applicable federal rates page, with a PDF for each month’s tables.9Internal Revenue Service. Applicable Federal Rates To pick the right December 2025 rate:
- Identify the term. Three years or less is short-term, over three through nine is mid-term, beyond nine is long-term.
- Sort demand from term. Demand loans use the short-term rate and get retested each period. Term loans lock in at origination.
- Match the compounding column to the language in your note.
- For installment property sales, check the current month and the two prior months, then use the lowest.
Rates change every month and sometimes swing meaningfully. Once a term loan closes, the rate is fixed for its full duration no matter what happens later, so checking a few months of rulings before finalizing the paperwork is worth the time.