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Traders Tax - Investors Have Limited Deductions

June 2004
by Joe Wishcamper, Esq.


The majority of individuals who, on a part-time basis, buy and sell securities, mutual funds, options, futures, commodities, and other derivatives, file as an investor.

Investors are typically people who have a job that provides W-2 income, or they are retired and trade as a hobby.

Here are the basics you need to know about investor tax deductions:

Are Investment Losses Deductible?

Your maximum allowable net capital loss deduction for any tax year is $3,000. If you have a Schedule D net capital loss more than $3,000, you'll have to carry over the remaining balance of the net capital loss until the succeeding tax year. This process goes on until the net capital loss is used up. In contrast, traders who select the Mark to Market accounting method can write off the entire loss in one year. Even better, you can apply the loss to taxable income from years past, and generate a tax refund!

Are Investment Expenses Deductible?

In general, if you itemize your deductions on Schedule A, you can deduct few of the expenses you incur in your investment activity. Examples of deductible expenses available to the investor include expenses for investment counseling and advice, legal and accounting fees, and investment newsletters. However, you must categorize these expenses as miscellaneous itemized deductions, and they are only deductible to the extent that they exceed 2% of your adjusted gross income.

How much investment interest you can deduct is limited to your net investment income. Net investment income is defined as your total investment income (which includes interest, dividend and royalty income) less your deductible investment expenses (investment expenses that exceed 2% of your adjusted gross income). Any investment interest that exceeds your net investment income is nondeductible in that year, but you can carry it forward in future tax years until it is used up.

How do I Deduct Commissions for Investments?

Commission expenses are included in your calculation of the total gain or loss from your trading activity. Include commissions in your total cost basis of any stock or option you purchased.

Can Investors Write off Ordinary and Necessary Business Expenses?

The cost of your data feed, equipment, utilities, seminars, transportation, hotels, meals, entertainment and other similar expenses are all non-deductible.


As you can see, the tax deductions available to you as an investor are limited. In contrast, the tax deductions you can take by running your investing through a business are substantial-in most cases, all of the expenses mentioned in this article that are non-deductible for you as an investor become deductible for you as a trader. Learn more about the advantages of establishing a trading business in the article on Trader Taxation.

by Joe Wishcamper, Esq.

Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. We do not and cannot offer investment advice. For further information please read our disclaimer.




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