Full-time investment traders receive the most liberal tax-treatment of their investment-related expenses. Still, as a part-time investor, you can offset a portion of your investment-related expenses by deducting them from your taxable income. The full amount of your expenses might not be deductible, depending on the type of expense, your total adjusted gross income, and other factors.
If you're a full-time trader and you make your living from trading investments, you deduct your expenses related to these trades, including advisory fees, on your Schedule C as self-employment expenses. A full-time trader is one who earns income primarily from buying and selling, profiting from short-term market swings. Full-time traders generally do not hold investments long-term.
To be deductible, any fees that you pay for investment advice must be for investments that produce taxable income. If you pay a financial counselor to advise you on investing in tax-exempt bonds, those fees are not deductible. The same is true for investment fees for an individual retirement account that are paid directly from the IRA.
IRA trustee fees are deductible in certain cases. If you pay a trustee fee for administration of the account, and if you pay that fee out of your after-tax income and not from the IRA assets, that fee is deductible. Maintain proof of this payment by retaining the canceled check or credit card statement. If the IRA trustee takes a fee as a percentage of assets for managing the investments in the account, that fee is not deductible.
If you pay a financial adviser a fee for investment advice, it's deductible as long as it meets the taxable income requirement. For example, if you pay your investment adviser $250 to review your investment goals and suggest investments for a taxable account, this fee is deductible.
Commissions that you pay as a percentage of the purchase price or sale amount of investments are not deductible from your income. These commissions are figured in to the cost basis of your investment, and you calculate your capital gains tax from the basis. If you invested $1,000 and paid a $10 commission, the investment basis is $1,010. If you later sell the investment for $1,100, you would pay capital gains tax on the $90 that is your gain after subtracting the commission.
If you use your computer to track investments, the cost of your computer is deductible based on the amount of time, as a percentage, that you use it for investment tracking. The same is true with any equipment, such as printers. The computer must generally be depreciated, meaning you take this deduction over several years. Computer software is deductible under the same rules. If the software is usable for only one year, such as with income tax preparation software, you can deduct the full value of the software that year.
Most investors claim investment expense deductions as miscellaneous itemized deductions on your Schedule A. Examples of other miscellaneous itemized deductions include unreimbursed employee business expenses and income tax preparation fees. You can deduct only the amount of total miscellaneous itemized deductions that exceed 2 percent of your adjusted gross income. If your adjusted gross income is $50,000 and you have miscellaneous itemized deductions of $1,600, you can deduct $600 -- the amount that exceeds 2 percent.