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Are Investment Expenses Deductible on Federal Taxes?

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raemart
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Are Investment Expenses Deductible on Federal Taxes?  Reply with quote  

While doing my taxes this year... today, it indicates I can claim 'investment expenses' when I itemize my deductions. Does that mean I can claim my trade fees and/or what it cost to buy a trade? I have only made 'free trades' through my brokerage but if I did pay the commission(s), would it be deductible?
Post Sat Apr 06, 2013 11:54 pm
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oldguy
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Yes, you pay tax only on 'net'.
Post Sun Apr 07, 2013 12:23 am
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coaster
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I think what oldguy is referring to is paying tax on your net capital gain; whereas I think what raemart is asking is about deducting trading expenses as an itemized deduction. Two different things. First of all, "investment expenses" has a very definite meaning tax-wise; it doesn't refer to your trading expenses:

http://www.irs.gov/publications/p550/ch03.html#en_US_2012_publink100010276

Trading commissions and fees are not deductible investment expenses; they are added to the cost of the shares to make "Cost Basis".

Further, you don't want to deduct any other incidental trading expenses as itemized deductions. It's a huge, and I repeat a *HUGE* IRS audit red flag. You need to be able to claim "trader status" in order to itemize trading expenses you may incur, such as cost of data, cost of research, office equipment, and so forth. And you don't qualify.

http://www.irs.gov/taxtopics/tc429.html

Here's how you handle your tax bookeeping as an investor:

Purchase:

Cost Basis = ( Shares * Market Price ) + Fees

Example: you bought 100 shares of XYZ at $35.7337 and incurred a $7.00 commission. Your cost basis is $3573.37 + 7.00 = $3580.37.

Sale:

Proceeds = ( Shares * Market Price ) - Fees

Example: you sold your 100 shares of XYZ at $39.5355 and incurred a $7.00 commission plus an exchange fee of $0.19. Your proceeds are:

$3953.55 - $7.19 = $3946.36

For the tax man:

Capital Gain = Proceeds - Cost Basis

Your capital gain is $3946.36 - $3580.37 = $365.99

Your tax (as of current law) is 15% of your capital gain if held long term (more than one year); if held less than one year it's taxed at your ordinary income marginal tax rate.

If you sell for less (proceeds < cost basis) then you have a capital loss. A long-term capital loss is netted against long-term capital gains, and a short-term capital loss is netted against ordinary income.

~Tim~
Post Sun Apr 07, 2013 3:59 am
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raemart
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Thanks Tim, Wow! you out did yourself on that explanation! I understand!
This calculation will come in very handy about 30 years from now when I sell. lol
Post Fri Apr 12, 2013 2:29 am
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coaster
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de nada. Wink

~Tim~
Post Fri Apr 12, 2013 4:11 am
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