Are Commissions Tax Deductible in Equity Trades?

If you make your own investment decisions, your commissions will be lower if you use an online broker.

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Unless you're buying stock directly from a company, such as in a direct stock purchase plan, you're probably buying that stock from another investor through a broker. You might use a full-service broker, a discount broker or an online broker, depending on how much service you require, but none of them work for free. You'll typically pay a commission for your equity trades whether you're buying or selling.

No Tax Deduction for Commission

Some expenses associated with your investments are tax deductible, but the commission you pay on equity trades is not one of them. That doesn't mean your commissions are completely without tax benefit. You can include them with your cost basis on purchase transactions and subtract them from the sales price when you sell. This reduces the amount of any capital gain you might earn on the trade.

Cost Basis

The basis of equity investments, such as stocks, is typically the price you paid for the stock plus the cost of acquiring it, which includes recording fees, transfer fees and commissions or sales charges. Your basis can change after the original purchase if you receive certain non-taxable distributions such as stock dividends, or if the stock splits. Since you might acquire additional stock in the same company at different times, determine the cost basis for each transaction. It will make a difference in how any gains or losses are taxed once you sell.

Deductible Investment Expenses

While you can't deduct commissions on equity trades, you can deduct some other expenses associated with acquiring and maintaining your investments. For example, you can write off the cost of investment-related publications. The fees you pay to an investment adviser are tax deductible. You can deduct a portion of the rental fees on your safe deposit box, if you use it to keep investment securities, such as your stock certificates. You can even write off the cost of inspecting investment property, but you can't deduct the cost of traveling to attend an annual stockholder's meeting, even if you own stock in the company.

2 Percent Rule

You'll have to itemize your deductions on Schedule A if you want to write off any of your investment-related expenses. The IRS considers these costs to be part of your miscellaneous deductions, so they must be added and the sum reported on Line 23 of Schedule A. You must then combine the amounts on Lines 21, 22 and 23 to determine your total miscellaneous expenses. These expenses are subject to the IRS's 2 percent rule. You can deduct only the total amount of these expenses that exceeds 2 percent of your adjusted gross income.

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About the Author

Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.

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