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Fees to borrow stock

This question originated on the ABA Tax Listserv and was asked by Bruce Steiner of Kleinberg, Kaplan, Wolff & Cohen, P.C. I am Cc'ing his e-mail address and am asking others to do like wise.

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An investor wants to borrow (to sell short) stock that is hard to borrow. The broker charges an additional fee per day. Is the fee

(a) Deductible as investment interest (subject to the limitations on the deductibility of investment interest), (b) Deductible as an investment expense (subject to the limitations on the deductibility of investment expenses), (c) Capitalized into the position, or (d) None of the above.

Detailed explanation of no more than 200 words in support of your answer is required.

Dick

Reply to
Dick Adams
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I am not aware of any such thing as "additional fee". There is a fee to borrow, which depends on the difficulty/cost of borrowing the stock, how well the broker likes the customer doing the borrowing, and other negotiatable factors. As far as I know, all of the fee has the same tax status.

Seth

Reply to
Seth

I don't have citations but I'll provide my opinion:

  1. The interest on the transaction is the margin interest charged by the broker for the loan, not the fee.
  2. The rules for security transactions require that you add commissions and fees for the transaction into cost. As such it is not investment expense as it directly relates to the security transaction.

So... that is (c) above.

Reply to
Alan

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