For many years, the IRS tried to tax interest-free or below-market-interest loans. However, court decisions supported taxpayers who argued that such loans did not result in taxable income or gifts. To reverse these decisions, the IRS convinced Congress to pass a law imposing tax on interest-free or low-interest loans made by individuals and businesses. You may not make interest-free or low-interest loans to a relative who uses the loan for personal or investment purposes without adverse income tax consequences, unless the exception discussed in this section for $10,000 or $100,000 loans applies.
If interest at least equal to the applicable federal rate set by the IRS is not charged, the law generally treats a below-market-interest loan as two transactions: