Writing off Interest for Stock Borrowing from Broker

On Tuesday, May 27, 2014 1:54:24 PM UTC-7, snipped-for-privacy@gmail.com wrote: | | Did I do this correctly? If so, are there any limits per year that I can | deduct this investment expense? I reside in New York.

Well, from the IRS Form 4952 instructions:

"Use this form to figure the amount of investment interest expense you can deduct for the current year and the amount you can carry forward to future years. YOUR INVESTMENT INTEREST EXPENSE DEDUCTION IS LIMITED TO YOUR NET INVESTMENT INCOME." [emphasis mine].

Since 2013, I started to use a broker (Schwab) that allows me for a fee to "borrow" stocks for shorting.

As an example: I call Schwab and tell them I want to short 1000 of AMZN. They tell me that they can loan me those shares for an daily interest fee of $75 per day. I agree, and short sell those shares at $300 per share and hold them for 5 days, after which, I cover them at $295 per share. This means that I made $5 x $1000 shares for a profit of $5,000 (minus the fees for the trades themselves). At the same time, I was charged separately $75 borrow fee x 5 days by the broker, for a total expense of $475.

When Schwab reports my short sell/buy transactions on the 1099-B, they do NOT include this "Interest Borrowing Fee" against my gain. They said that you must report it separately.

So what I did was tally-up all of these separate Stock Borrow Service Fees that were incurred during 2013 and entered them into my tax return as:

Investment Interest Expense ( Form 4952, line 3) My worksheet lists it as: Schwab Stock Borrow Service Fees (+ Interest)

Did I do this correctly? If so, are there any limits per year that I can deduct this investment expense? I reside in New York. ============================= I would have put only the interest expense on Form 4952, and the fees on Schedule A miscellaneous subject to the 2% AGI floor.

Your way would be correct only if you could establish that the fees were some sort of pre-paid interest or minimum interest charge (i.e. the fee varies with the amount borrowed).

Thank you for the reply.

This is exactly pre-paid interest, as even if I borrow the stock intraday (meaning short it and then cover it immediately for profit or loss the same day), I would still pay one day's INTEREST on it. Different stock has different borrowing costs. Some they only charge 1% daily rate of the amount borrowed, and some are charged 90% daily rate. So I am pre-paying the interest.

Minor comments:

1. It really should say Limited to your net investment income that is taxed as ordinary income. Otherwise one might think that the qualified dividend portion of an ordinary dividend, or a mutual fund's capital gains distributions, or long term capital gains, count as part of net investment income. On the other hand, taxpayer can elect to treat those income items shown above as ordinary income and forego the more favorable tax rates, in order to deduct more investment interest.

1. I believe it is a misnomer to refer to day trading results as "investments."

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