Is Margin Interest Tax Deductible?

The world of investing is vast, exciting and often expensive for individual traders. Occasionally, you’ll encounter an investment opportunity you don’t want to pass up but can’t quite afford. Fortunately, you can borrow the funds necessary from your broker to acquire the asset and pay margin interest for the loan. Furthermore, you can deduct the cost of trading on margin from your taxes, allowing you to reduce your tax burden while trading assets you don’t have the financial capacity to purchase on your own. Here are the details on margin interest and how to deduct the costs from your taxes.

Consider working with a vetted financial advisor to discuss whether the investment makes sense for you and, if so, how you can deduct margin interest from your taxes.

What Is Margin Interest?

Margin interest is the cost you pay when you borrow money from your brokerage to purchase securities, essentially, it’s a loan backed by the investments in your account. Trading “on margin” allows investors to buy more assets than they could with cash alone, amplifying both potential gains and losses. The brokerage charges interest on the borrowed funds, which accrues daily and is typically billed monthly.

When you open a margin account, your brokerage allows you to borrow a percentage of the purchase price of eligible investments. The amount you can borrow is determined by the margin requirement, usually around 50% for most stocks. For example, if you want to buy $20,000 worth of stock, you might use $10,000 of your own money and borrow the remaining $10,000. You’ll then owe interest on that borrowed amount for as long as it remains unpaid.

Margin investing can increase your buying power and potentially boost returns when the market moves in your favor. However, it also magnifies losses if the market declines, since you’re using borrowed money. For that reason, margin investing is best suited for experienced investors who can closely monitor positions and manage risk.

How to Calculate Margin Interest?

Interest rates among all kinds of industries fluctuate, and margin interest is no exception. The investment firm you use, the amount of money you borrow, and how quickly you sell an asset after purchasing will influence your interest rate.

To calculate the costs of margin interest, you’ll multiply your loan by your interest rate and divide the result by 360 (the number investment firms use for days in a year). Finally, you’ll multiply the result by the number of days you plan to hold the asset.

For example, say you borrow $20,000 to buy stock. Your brokerage firm charges you an effective interest rate of 7.5%, and you believe you’ll make the most profit by selling the stock after holding it for one week.

So, you calculate margin interest by first multiplying the loan amount by the interest rate:

$20,000 x 0.075 = $1,500

Then, divide the result by 360:

$1,500/360=$4.16, which is how much interest you accrue per day while the loan is in effect.

Finally, multiply the daily interest charge by the number of days you hold the asset:

$4.16×7 days = $29.12

Therefore, if you trade on margin and buy $20,000 of stock, you’ll pay $29.12 of margin interest when selling the stock one week later (seven days).

Is Margin Interest Tax Deductible?

Margin interest is tax deductible if you itemize your deductions. In addition, you can’t deduct more margin interest than your net investment income. Therefore, you must receive net income when combining taxable interest, dividend payments, and short-term capital gains to receive a tax deduction for margin interest paid in the same tax year.

In other words, you aren’t eligible to receive a deduction for margin interest if you take the standard deduction when filing taxes or pay $0 of margin interest in the tax year. You also aren’t eligible if you haven’t received any net investment income for the tax year.

Lastly, you can carry over margin interest to future tax years. As a result, past tax years of margin interest can create a tax deduction in the current tax year. Remember, you’ll need to itemize your deductions and have net investment income of greater than $0 to apply margin interest deductions.

Margin Interest Tax Deduction Caps

Your net investment income will cap your margin interest tax deduction for the current tax year. For example, say your investments gave you a net investment income of $1,000, and you have $5,000 of margin interest to deduct from your taxes. However, you can only deduct up to your net investment income for the year ($1,000). Therefore, you can deduct $1,000 of margin interest for this year’s taxes and carry over the remaining $4,000 to future years.

Bottom Line

Margin interest is the cost of borrowing from your broker to invest in securities, and it can be tax-deductible if you itemize your deductions. You can only deduct margin interest up to your net investment income for the year, but any unused amount can carry forward to future years. This means margin trading can offer both investment leverage and potential tax benefits, if managed carefully within IRS limits.

Tips for Margin Interest Tax Deductions

Deducting the maximum amount from your taxes is an excellent way to get ahead financially. Because tax regulations are complex and ever-changing, consider hiring a financial advisor specializing in taxes. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
The Tax Cuts and Jobs Act Taxpayers changed the implications of itemizing deductions. Taking the standard deduction prevents you from claiming margin interest on your taxes, so understanding whether to itemize is vital. Use this guide to see if you should itemize deductions under current tax laws.