Are Investment Expenses Deductible? Interest, Basis, Traders

For the 2026 tax year, most investment expenses are not deductible on your federal return. The One Big Beautiful Bill Act, signed July 4, 2025, made the suspension of miscellaneous itemized deductions indefinite, so fees for financial advisors, custodians, and investment-related tax preparation continue to provide no federal deduction.¹ Two categories still carry tax benefits: interest paid on money borrowed to invest, and transaction costs that fold into the cost basis of what you buy and sell.

Fees and Costs You Cannot Deduct

The suspension that began in 2018 under the Tax Cuts and Jobs Act was set to expire after 2025. It did not. The 2025 law removed the sunset date, so the following common investment costs remain non-deductible on your federal return with no scheduled end:

Advisory and management fees paid to financial advisors, portfolio managers, or robo-advisory platforms.
Custodial fees charged by banks or brokerages for holding your assets.
Tax preparation fees tied to your investment income.
Financial planning and wealth management consultation fees.
Investment research subscriptions, newsletters, and data services.

One boundary worth knowing: some states did not conform to the federal suspension and still allow a deduction for these costs on the state return. If you pay significant advisory or management fees, check your state’s rules when you file.

Investment Interest You Can Deduct

Interest you pay on money borrowed to buy or hold investments is deductible if you itemize. The most common example is margin interest charged by your brokerage when you borrow against your account to buy stocks or bonds. To get any benefit, your total itemized deductions have to exceed the standard deduction for your filing status. For 2026 the standard deduction is $16,100 for single filers, $32,200 for married filing jointly, and $24,150 for heads of household.²

The deduction is capped at your net investment income for the year. Net investment income includes taxable interest, non-qualified dividends, short-term capital gains, and certain royalties. It does not include long-term capital gains or qualified dividends unless you elect to treat them as investment income.³

Electing to Include Qualified Dividends and Long-Term Gains

If your margin interest is larger than your net investment income, you can elect to pull qualified dividends and long-term capital gains into that calculation. The cap goes up and you deduct more interest. The trade-off: the dividends and gains you include lose their preferential rate (typically 0, 15, or 20 percent) and are taxed at your ordinary income rate.⁴ Run the math both ways before making the election, because it generally can only be revoked with IRS consent.

Carrying Forward Unused Interest

Investment interest that exceeds your net investment income in the current year is not lost. The excess carries forward to the next tax year and can offset investment income then. That carryforward continues indefinitely until the full amount is used.³

Interest That Does Not Qualify

Not every interest cost tied to your finances counts as deductible investment interest:

Interest on loans used to buy or hold tax-exempt securities, such as municipal bonds, is not deductible. You cannot claim a deduction for the cost of generating income that itself escapes tax.⁵
Interest allocable to a passive activity, such as a limited partnership or a rental where you do not materially participate, is not investment interest. It runs through the passive activity loss rules instead.⁶
Personal interest, including credit card interest and home equity loan interest used for non-investment purposes, does not qualify even if you also hold investments.
Interest on debt used to buy or carry life insurance, endowment, or annuity contracts issued after June 8, 1997, is disallowed even when the proceeds go into investment property.⁴

Transaction Costs Work Through Cost Basis

Brokerage commissions, front-end mutual fund loads, and transfer fees on a purchase are not written off in the year you pay them. They add to your cost basis, which is what you paid for the investment for tax purposes.⁷ When you sell, your taxable gain or deductible loss is the difference between the sale proceeds and that basis. A higher basis means a smaller taxable gain, or a larger deductible loss. Selling costs work the other direction, reducing your net proceeds. These adjustments happen inside the gain-or-loss calculation and are not a separate line on your return.

Wash Sale Losses Move Into Basis

If you sell a security at a loss and buy a substantially identical one within 30 days before or after the sale, the wash sale rule disallows the loss for that year.⁸ The loss is not gone. It attaches to the basis of the replacement shares. If you sold at a $250 loss and bought replacement shares for $800, your basis in the new shares is $1,050.⁹ You recover the disallowed loss when you eventually sell those replacement shares.

Stock Splits

A stock split is not a taxable event and does not change your total basis. Your existing basis is spread over the new share count. Owned 100 shares with a total basis of $1,500 before a 2-for-1 split? You own 200 shares afterward with the same $1,500 total basis, and your per-share basis drops from $15 to $7.50.¹⁰ Brokerages track this automatically for covered securities.

The $3,000 Cap on Net Capital Losses

When your total capital losses for the year exceed your total capital gains, you can deduct up to $3,000 of the net loss against ordinary income, or $1,500 if married filing separately.¹¹ Anything beyond that carries forward to future years.

Trader Status Changes the Rules

The IRS treats most people who buy and sell securities as investors, even if they trade frequently. Qualifying as a trader in securities is a different tax category with different treatment, and the bar is high. All of the following have to be true:

You seek to profit from daily price movements rather than dividends, interest, or long-term appreciation.
Your trading is substantial in both frequency and dollar amount.
You carry it on with continuity and regularity; occasional trading does not qualify.

The IRS also weighs your typical holding period, the time you devote to trading, and whether it is a primary income source. Calling yourself a day trader does not make you one for tax purposes.¹²

Qualifying traders can make a mark-to-market election under Section 475(f). It treats gains and losses from securities sales as ordinary rather than capital, which removes both the $3,000 capital loss cap and the wash sale rule. Ordinary losses can offset any type of income without a limit. Investors cannot make this election. It generally must be filed with your prior-year return by that return’s original due date, and once in place it applies to all later years unless the IRS approves revocation. Because it also strips potentially favorable long-term capital gains of their preferential treatment, analyze the trade-off before filing.¹²

Forms and Records You Will Need

Claiming the interest deduction and reporting accurate basis both depend on paperwork. Brokerages report basis on Form 1099-B for covered securities, generally stock acquired after 2010 along with certain debt instruments and options acquired after 2013 or 2015. For covered securities, the broker reports the acquisition date, basis, holding period, and any disallowed wash sale loss.¹³ For noncovered securities, you have to keep your own records.

The forms that matter:

Form 1099-INT and Form 1099-DIV report the interest and dividend income that feeds your net investment income cap.
Form 1099-B reports sales proceeds and basis for securities transactions and feeds Form 8949 and Schedule D.
Brokerage year-end statements show total margin interest paid.
Form 4952 is the worksheet for calculating the investment interest deduction and any carryforward.⁴
Schedule A (Form 1040) is where the final investment interest deduction lands as an itemized deduction.

Hold on to original purchase confirmations, commission receipts, and notices for corporate actions such as splits, mergers, and spin-offs while you own the investment and for at least three years after you sell it and report the result. Those records matter most for noncovered securities and inherited assets, where the broker may not have complete basis information.

1
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Office of the Law Revision Counsel. 26 USC 163 – Interest
4
Internal Revenue Service. Form 4952 – Investment Interest Expense Deduction
5
Office of the Law Revision Counsel. 26 U.S. Code 265 – Expenses and Interest Relating to Tax-Exempt Income
6
Office of the Law Revision Counsel. 26 U.S. Code 469 – Passive Activity Losses and Credits Limited
7
Office of the Law Revision Counsel. 26 USC 1012 – Basis of Property – Cost
8
Office of the Law Revision Counsel. 26 U.S. Code 1091 – Loss From Wash Sales of Stock or Securities
9
Internal Revenue Service. Case Study 1 – Wash Sales
10
Internal Revenue Service. Stocks (Options, Splits, Traders) 7
11
Office of the Law Revision Counsel. 26 U.S. Code 1211 – Limitation on Capital Losses
12
Internal Revenue Service. Topic No. 429 – Traders in Securities
13
Internal Revenue Service. Instructions for Form 1099-B