Is Margin Interest on Brokerage Transactions Tax Deductible

Margin interest on brokerage transactions is tax deductible at times, but the rules are complex. Depending on your situation, writing off margin interest on your taxes is possible, but some of the strategies to qualify for the write off may end up costing you more in the long run. If you have substantial margin interest that you want to write off, you should definitely consult with your tax professional first.

Margin interest can only be written off against investment income received, so you first have to know how much investment income you have. Investment income includes such things as interest, dividends and short-term capital gains. Long-term capital gain can also be considered investment income as long as you elect to make it so. If you do make that election, those long-term capital gains will no longer gain the benefit of the preferential tax rate for long-term gains. This is the tricky part; you don’t want to save a few pennies today to cost yourself dollars next tax year.

You also have to consider what you buy with your margin money. You cannot buy personal property and write off the margin interest against investment income. You can only purchase investments (stocks, bonds, etc). It even gets more complicated than that. You cannot purchase investments that generate tax-free income if you want to write of your margin interest. As the income is tax free, you cannot write off taxes against it.

The only place you can write of margin interest is on IRS form 4952. Do not try to reduce your cost basis, or write it off as an itemized deduction on Schedule A. That is not the correct place to take margin deductions, and doing so will cause you pain in the case of an audit (in fact, doing so may trigger an audit). You can download Form 4952 including instructions here. It is also recommended you review IRS publication 550 for more background on investment income and expenses.

Timing is also something you have to consider. You can only write off the margin interest in the year you paid it (the tax year the interest was removed from you brokerage account). To file Form 4952, you must itemize your deductions. You can carry over investment income from prior years in which you used the standard deduction.

For most people, writing off margin interest will never be something worth worrying about, but it some cases, it makes sense. Consult with your tax adviser to see if writing off margin interest makes sense for you.