Portfolio Deductions: Interest, Capital Losses, and Foreign Taxes

Most of the everyday costs of running a personal investment portfolio are no longer deductible. Advisory fees, custodial charges, research subscriptions, and similar expenses were suspended by the Tax Cuts and Jobs Act in 2018 and then made permanently non-deductible by the One Big Beautiful Bill Act of 2025.¹ Still, the list of investment costs that are tax deductible is shorter than it used to be but far from empty: margin and other investment interest, capital losses, foreign taxes paid on dividends, bond premium amortization, and a wider set of business-style expenses for landlords and qualifying traders all remain on the table.

What You Can No Longer Deduct

Before 2018, investment-related expenses were deductible on Schedule A to the extent they exceeded 2% of adjusted gross income. Many investors assumed those write-offs would return in 2026 when the TCJA sunset. They won’t. Section 67(h) now makes the elimination permanent, so there is no future date to plan around.¹

The costs that are gone for individual investors include investment advisory fees paid to a financial advisor for managing a taxable brokerage account, custodial and account maintenance fees, subscriptions to investment newsletters and market data services, the portion of a tax preparer’s fee attributable to investment reporting, safe deposit box rental used for investment documents, and the cost of investment seminars or courses. All of these now come out of after-tax dollars.

One planning note: some states did not conform to the federal change and still allow these deductions on state returns. If you itemize at the state level, it is worth checking your state’s rules before writing them off entirely.

Investment Interest Expense

If you borrow money to buy investments held outside a retirement account, the interest is still deductible. That covers margin interest from a brokerage account, interest on a personal loan used to purchase securities, and similar borrowing tied to taxable holdings.² The deduction lives on Schedule A, so you only benefit if you itemize.

Your annual deduction is capped at your net investment income. That figure includes interest, ordinary dividends, royalties, annuities, and short-term capital gains, minus investment expenses other than interest. It does not include qualified dividends or long-term capital gains unless you affirmatively elect to treat them as ordinary investment income on Form 4952.² Making the election lets you deduct more interest, but those dividends and gains then lose their preferential rate. Run the math both ways.

Interest you cannot use in the current year because of the cap carries forward indefinitely, subject to the same cap in each future year.³ Attach Form 4952 to your return to show the calculation.

Tracing the Loan Matters More Than the Collateral

The IRS allocates interest based on what you did with the borrowed money, not what secures the debt. Pledging a stock portfolio to fund a car purchase produces personal, non-deductible interest. An unsecured personal loan whose proceeds went entirely into a taxable brokerage account produces deductible investment interest.⁴ When a single loan has mixed uses, you have to trace which portion funded investments and deduct only that share.

A Bonus Against the Net Investment Income Tax

Investment interest also reduces the base for the 3.8% Net Investment Income Tax, which applies to individuals with modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly).⁵ The same interest you deduct on Schedule A flows through to Form 8960 and lowers your NIIT base, so the deduction can save you tax twice.⁶

Capital Losses

Losses on stocks, bonds, mutual fund shares, and other capital assets remain fully usable. Short-term losses first offset short-term gains, long-term losses first offset long-term gains, and any remaining net loss then offsets gains of the other type.⁷

If losses still exceed gains after that netting, you can deduct up to $3,000 of the excess against ordinary income like wages. The cap drops to $1,500 for married filing separately. Anything you cannot use carries forward indefinitely, keeping its short- or long-term character until it runs out.⁷ The netting is reported on Form 8949 and Schedule D.

Wash Sales

You cannot sell a security at a loss and buy a substantially identical one within 30 days before or after the sale. The loss gets disallowed, though it is not lost permanently: the disallowed amount is added to the basis of the replacement shares and comes back to you when those shares are eventually sold in a non-wash transaction.⁸ The rule reaches across accounts, including IRAs, so buying the same stock in your retirement account inside the window still triggers disallowance.

Tax-loss harvesting is a legitimate strategy as long as you respect the 61-day window. Investors who want to stay exposed to the same market segment often swap into a similar but not substantially identical fund, such as moving from one S&P 500 index fund to a different provider’s total market fund.

Picking Which Shares to Sell

When you hold shares bought at different times and prices, specific identification lets you choose which lot you are selling and therefore what gain or loss you realize. Tell the broker before the trade settles. If you do not identify specific shares, the default is first-in, first-out, which often produces a worse tax result.⁹ Most brokerages let you set the cost-basis method in your account settings.

Worthless Securities and Section 1244 Stock

If a security becomes genuinely worthless, you can claim a capital loss as if you sold it for zero on the last day of the year it became worthless.¹⁰ A steep drop in price is not enough; the company must have no assets, no ongoing business, and no realistic prospect of recovery.¹¹

Losses on qualifying small business stock get better treatment under Section 1244. If you bought the stock directly from a corporation that received no more than $1 million in total capital contributions for its stock, up to $50,000 of loss per year, or $100,000 on a joint return, is treated as an ordinary loss rather than a capital loss.¹² Ordinary loss treatment offsets regular income dollar for dollar and sidesteps the $3,000 annual cap.

Foreign Taxes on Investment Income

When a foreign government withholds tax on your dividends or interest, you can either claim a foreign tax credit that reduces your U.S. tax dollar for dollar, or deduct the taxes as an itemized deduction. The credit is almost always better. A $500 credit cuts $500 of tax; a $500 deduction might save $120 depending on your bracket.

If total foreign taxes for the year are $300 or less, or $600 on a joint return, and all of them were reported to you on Forms 1099 or Schedule K-1, you can take the credit directly on Form 1040 without filing Form 1116.¹³ Above that, Form 1116 is required, and the credit in any year is capped at the U.S. tax attributable to your foreign-source income. Excess credits carry back one year and forward ten.

Bond Premium Amortization

Buy a taxable bond for more than face value—the usual result when the coupon rate is above current market rates—and you can elect to amortize the premium over the bond’s remaining life. Each year’s amortization offsets your interest income from that bond, reducing taxable income without any cash outlay.¹⁴ The election applies to every taxable bond you hold and every one you buy afterward, and it is binding unless the IRS lets you revoke it.

For tax-exempt municipal bonds, amortization is mandatory but produces no deduction; it simply reduces your basis. For taxable bonds, the election usually reflects economic reality: part of each coupon payment is really a return of the premium you paid, not true income.

If You Trade as a Business

Activity that rises to the level of a trade or business changes the picture. A securities trader reports expenses on Schedule C, where costs the ordinary investor can no longer deduct—data feeds, trading software, market research, a home office—become fully deductible business expenses.¹⁵ Those deductions reduce adjusted gross income and are available even if you take the standard deduction on the personal side.

The bar for trader status is high. The IRS looks at the volume and frequency of trades, whether holding periods are short enough to profit from daily price swings, and how much of your time the activity absorbs. Buying index funds and rebalancing quarterly does not qualify. Someone executing hundreds of trades a month with holding periods measured in days has a real case; someone making a few dozen trades a year does not.

Commissions and transaction costs stay in cost basis even for traders. They are not Schedule C expenses. One benefit of trader status: securities gains and losses are not subject to self-employment tax even though they sit alongside a Schedule C business.¹⁵

The Section 475(f) Mark-to-Market Election

Qualifying traders can elect under Section 475(f) to treat all securities gains and losses as ordinary rather than capital. The big benefit is on the loss side: ordinary losses are fully deductible against any income, with no $3,000 annual cap. A trader with $200,000 of losses in a bad year can deduct the whole amount.¹⁶

The cost is that winning trades lose the long-term capital gains rate, and every open position must be marked to market at year-end, with unrealized gains recognized as income. The election has to be filed by the original due date, without extensions, of the return for the year before it takes effect, and it is binding for all future years unless the IRS consents to revocation.¹⁵

Rental Real Estate Is a Separate Track

If you own rental property, the deduction rules for that activity are not the same as the ones governing stock and bond expenses. Rental costs go on Schedule E and are deducted against rental income without the miscellaneous-itemized restrictions.¹⁷ Mortgage interest, property taxes, insurance, property management fees, ordinary maintenance and repairs, tenant advertising, and landlord-paid utilities are all deductible. Larger improvements that extend the property’s life must be capitalized and depreciated instead of written off in the year of purchase.

Rental real estate is generally passive, and losses are usually blocked from offsetting wages or portfolio income.¹⁸ An active participant can deduct up to $25,000 of rental losses against non-passive income, but the allowance phases out between $100,000 and $150,000 of modified adjusted gross income and is zero for married filing separately taxpayers who lived with a spouse during the year.¹⁹ Suspended passive losses carry forward and are released in full when you dispose of the property in a fully taxable sale.

Qualified Opportunity Zone Deferral

Opportunity Zones offer a different kind of benefit: deferral and potential exclusion of capital gains rather than a deduction. Reinvest a realized capital gain into a Qualified Opportunity Fund within 180 days and the tax on that gain is deferred, but no later than December 31, 2026. On that date any remaining deferred gain becomes taxable whether or not you have sold the QOF interest.²⁰

The stronger benefit rewards patience. Hold the QOF investment for at least ten years and the appreciation in the QOF itself is never taxed; basis is adjusted to fair market value at sale, wiping out capital gains tax on the growth.²⁰ With the December 2026 recognition date approaching, investors holding deferred gains should be looking at the cash needed to pay that tax now, not later.

1
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
2
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
3
Internal Revenue Service. Form 4952 (2025) – Investment Interest Expense Deduction
4
eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures (Temporary)
5
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
6
Internal Revenue Service. Instructions for Form 8960
7
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
8
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
9
Internal Revenue Service. Stocks (Options, Splits, Traders) 1
10
GovInfo. 26 USC 165 – Losses
11
eCFR. 26 CFR 1.165-5 – Worthless Securities
12
Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock
13
Internal Revenue Service. Instructions for Form 1116 (2025)
14
Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium
15
Internal Revenue Service. Topic No. 429, Traders in Securities (Information for Form 1040 or 1040-SR Filers)
16
Office of the Law Revision Counsel. 26 USC 475 – Mark to Market Accounting Method for Dealers in Securities
17
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
18
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
19
Internal Revenue Service. Instructions for Form 8582 (2025)
20
Internal Revenue Service. Opportunity Zones Frequently Asked Questions