Although savvy investing can yield significant returns for investors, it would be a mistake to believe that this process isn't expensive in its own right. When investors use retail brokerage services for their market trading, they are often required to pay a variety of fees. Whether compensating the brokerage for insight and advice, or simply paying a per-trade commission fee, it is almost impossible to avoid these out-of-pocket expenses when making trades. However, recent tax law changes have altered how you'll report these fees to the Internal Revenue Service.
Following changes to the tax law as part of the 2017 Tax Cuts and Jobs Act, you can no longer report service fees as part of your tax deductions on IRS Form 1040 Schedule D. If you qualify as a professional investor, however, these expenses may become tax deductible yet again.
Tax Year 2018 Service Fee Deductions
Prior to the introduction of the Tax Cuts and Jobs Act of 2017, many of these expenses qualified as valid tax deductions. However, it is now more likely that your service fees will not be an eligible deduction on your next tax return. That being said, you will still use Schedule D of IRS Form 1040 in order to report a variety of important information related to your annual investment activity.
1040 Schedule D Basics
As an investor, Schedule D of IRS Form 1040 is an integral part of your yearly tax filing. This particular form is used to document information such as 1040 capital gains distributions and the sale of capital assets that have not been reported elsewhere on your tax return. In situations where you may have been required to complete other tax forms, such as the "Qualified Dividends and Capital Gain Tax Worksheet" or the "28% Rate Gain Worksheet," you will also be required to input figures calculated using these forms on Schedule D.
Generally speaking, Schedule D provides the IRS with a concise and comprehensive overview of your investing activity and helps them clarify any outstanding issues with tax obligations that may exist due to your investment activity.
Elimination of Specific Deductions
As mentioned previously, the introduction of the Tax Cuts and Jobs Act of 2017 eliminated a variety of individual tax deductions in favor of raising the standard deduction for all taxpayers. Because of this, however, a variety of brokerage service fees are no longer deductible. The former investment expense deduction is now no longer allowed on tax returns, which means that any of the service fees you were forced to pay as part of your investment activities will not qualify for deductions. This is a comprehensive measure, meaning that there are few, if any exceptions that may exist for the vast majority of investors.
That being said, similar fees may qualify as a deduction in the event that the individual paying them is a professional, self-employed investor rather than someone who invests funds outside of their standard work. In such a scenario, these expenses would be considered a qualifying deductible expense that is necessary for employment.
Exploring Trader Tax Status
In order to gain recognition as a professional investor, also referred to as Trader Tax Status, you must adhere to a variety of regulations imposed by the IRS. Examples include spending at least four hours of each weekday developing your professional trading activity, executing trades multiple times a week and completing a mandated minimum number of trades per year, among others. Although TTS can help dramatically reduce your tax bill, failure to properly gain this recognition from the IRS while still claiming these deductions could result in a number of fines and penalties.
Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.