Are Margin Loans Tax Deductible? Limits, Form 4952, and AMT

Margin loans are tax deductible in a narrow sense: the interest you pay on a margin loan can be deducted as investment interest expense, but only if you itemize on Schedule A, only up to your net investment income for the year, and only to the extent you used the borrowed money to buy or hold taxable investments. What the loan is secured by does not matter. What you did with the cash does.

What You Did With the Money Controls the Deduction

The IRS applies interest tracing rules under Treasury Regulation 1.163-8T, which allocate interest based on how the borrowed funds were actually spent.¹ Borrow $50,000 on margin and buy stock, and the interest is deductible investment interest. Borrow the same $50,000 and buy a boat, and the interest is nondeductible personal interest, even though your portfolio still secures the loan. Split the proceeds between a stock purchase and a personal expense, and you split the interest proportionally.

The burden of proving the use is yours. Brokerage statements, trade confirmations, and bank records should show a direct path from the margin borrowing to the investment purchase. If you cannot trace the proceeds, the default treatment on audit is nondeductible personal interest, and the entire deduction can disappear.

The Net Investment Income Cap

Even when the loan clearly funded investments, you can only deduct margin interest up to your net investment income for the year.² Pay $10,000 in margin interest, earn $7,000 in net investment income, and you deduct $7,000 this year. The other $3,000 carries forward.

What Counts as Investment Income

Investment income for this calculation includes taxable interest, ordinary dividends, royalties, annuity income, and short-term capital gains from investment property.² Tax-exempt income does not count.³ Long-term capital gains and qualified dividends are excluded by default because they already receive preferential rates. You can elect to pull them in, with consequences described below.

Investment expenses used to reduce this figure, but the Tax Cuts and Jobs Act suspended the deduction for miscellaneous itemized expenses starting in 2018, and the One, Big, Beautiful Bill Act made that suspension permanent for 2026 and beyond.⁴ For most investors, net investment income now equals gross investment income.

The Carryforward Has No Expiration

Disallowed interest rolls forward to the next tax year and is treated as margin interest paid that year.² It keeps rolling until you have enough net investment income to absorb it, with no deadline. A year with modest ordinary investment income is not the end of the deduction, only a delay.

Uses That Make Margin Interest Nondeductible

Several loan uses either eliminate the deduction or route it somewhere other than Schedule A.

Tax-exempt securities. Interest on debt used to buy or hold obligations producing tax-exempt income is never deductible.⁵ Borrowing on margin to buy municipal bonds is the common example. The code blocks a tax benefit on both sides of the same transaction.

Personal expenses. Margin proceeds spent on anything outside investment activity generate nondeductible personal interest. Paying off credit cards, funding a vacation, a car down payment: all personal, regardless of what collateral sits in the account.

Passive activities. Interest on margin loans used to fund a passive activity, like a limited partnership where you are not materially involved, falls under the passive activity loss rules rather than the investment interest rules.⁶ Passive losses generally only offset passive income. Treating this interest as investment interest is a common audit adjustment.

Straddle positions. Interest and carrying charges allocable to a straddle must be added to the cost basis of the property rather than deducted currently.⁷ The rule applies to debt incurred to purchase or carry personal property that is part of a straddle, but not to hedging transactions. Options traders using margin should check this carefully.

Electing to Include Capital Gains and Qualified Dividends

Investors with heavy margin interest and limited ordinary investment income can elect to treat some or all of their long-term capital gains and qualified dividends as investment income, which raises the deduction ceiling. The election is made on Form 4952, line 4g.⁶

The amount you elect in loses its preferential rate and gets taxed as ordinary income. Someone in the 24% bracket who elects to include $10,000 in long-term capital gains gives up the 15% rate on that income, paying an extra $900. The election only makes sense if the margin interest deduction unlocked by that $10,000 saves you more than the $900 you lose on the rate change. Run both calculations.

The election is generally made on a timely filed return. You can also make it on an amended return filed within six months of the original due date (excluding extensions) by writing “Filed pursuant to section 301.9100-2” on the return.⁶

How to Claim Margin Interest on Your Return

Form 4952 and Schedule A

You compute the allowable deduction on Form 4952, which runs through your investment income, the net investment income limit, and any carryforward from prior years.⁶ The result flows to Schedule A (Form 1040), line 9.⁸

Your brokerage reports margin interest charged during the year on your year-end statement or consolidated tax document. Unlike interest income, margin interest paid does not get its own 1099. You pull the figure from your brokerage records yourself.

You Have to Itemize

Investment interest is an itemized deduction. If your total itemized deductions do not exceed the standard deduction, claiming margin interest produces no current-year tax savings. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.⁹ Interest you cannot use because you took the standard deduction does not reduce the carryforward: the unused amount continues to roll forward until you can itemize and absorb it.

When Interest Is Considered Paid

Cash-method taxpayers deduct margin interest in the year it is actually paid. Payment happens when you send funds to the broker or when the broker takes payment from your account, including through collecting your dividends or selling securities on your behalf to cover the charge.⁸ Interest that accrued but was not paid by year-end moves to the following year.

Keep the Paper Trail

Keep brokerage statements showing the interest charged, confirmations showing what you bought with the borrowed funds, and records that tie the two together. These documents substantiate the Form 4952 numbers and satisfy the tracing rules. The default treatment of untraced margin proceeds is nondeductible personal interest, which is where most of these deductions fail on audit.

If You Owe Alternative Minimum Tax

Filers subject to AMT must complete a second Form 4952 using AMT rules. The difference between the AMT-allowed deduction and the regular deduction goes on Form 6251, line 2c.¹⁰ A capital gains election made on the regular Form 4952 carries through, but the underlying income and expense figures can change under AMT rules. Investors with large margin balances should model both before filing.

1
eCFR. 26 CFR 1.163-8 – Allocation of Interest Expense Among Expenditures
2
Office of the Law Revision Counsel. 26 USC 163 – Interest
3
Internal Revenue Service. Instructions for Form 8960 (2025)
4
Office of the Law Revision Counsel. 26 US Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
5
Office of the Law Revision Counsel. 26 US Code 265 – Expenses and Interest Relating to Tax-Exempt Income
6
Internal Revenue Service. Form 4952, Investment Interest Expense Deduction
7
Office of the Law Revision Counsel. 26 US Code 263 – Capital Expenditures
8
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
9
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill
10
Internal Revenue Service. 2025 Instructions for Form 6251 – Alternative Minimum Tax—Individuals