Is Margin Loan Interest Tax-Deductible?

Margin accounts let you borrow from your broker to pay for securities.
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You can deduct margin loan interest on Schedule A of Internal Revenue Service Form 1040. The deduction is subject to certain restrictions and limitations. You may be able to carry forward excess margin interest expenses to future tax years.

Margin Interest

A margin investment account is an arrangement in which your broker lends you part of the cost of securities in your account. The U.S. Federal Reserve Board's Regulation T limits the amount you can borrow in a margin account to half the value of securities in the account. Your broker charges interest on margin loans, and you can deduct the portion that doesn't exceed your net investment income for the year. Margin interest stemming from money you borrow to buy tax-free securities is not deductible.

Net Investment Income

Your annual investment income is the interest and ordinary dividends you earn on your securities. It doesn't include capital gains from the sale of securities or qualified dividend income, which comes from dividends that are taxed at the long-term capital gains rate. However, you can elect to include capital gains and qualified dividends in your investment income. The net amount is what remains of your investment income after you subtract all your investment expenses except for interest expense.

Limitations on Margin Deductions

The margin interest you deduct must be paid to your broker during the tax year. The amount of deductible margin interest stemming from the purchase of certain taxable bonds is limited to the expense that exceeds the interest and discount income you earn on these bonds. Discount income is a form of interest you earn on bonds you purchase for less than face value -- the principal amount you receive when the bond matures.

Reporting Interest Deductions

If your investment interest expenses, including margin interest, exceed your net investment income, you need to fill out IRS Form 4952. You use this form to report your current investment interest expense deduction and the amount you'll carry forward to future tax years. Enter the deductible interest amount on the "investment income" line of Schedule A and attach a copy of Form 4952 if you filled one out. Enter you total Schedule A deductions onto Form 1040.