The commissions that you pay when you buy and sell stock reduce your taxable income, but they aren't deductions in the same way as mortgage interest, state income taxes or charitable donations. Instead of being written off your income, they are added and subtracted from your stock's transaction price, reducing your taxable profit or increasing your tax-sheltering loss. However, you can claim a traditional deduction on some other investment expenses.
Commissions and Cost Bases
When you buy and sell stock, your profits are subject to capital gains tax. The Internal Revenue Service doesn't define profit as the difference between your buying price and your selling price, though. Your profit is calculated based on your net price, so if you buy stock for $2,000 and sell it for $3,000, but pay separate $50 commissions for both the purchase and the sale, your taxable profit is $900. Reducing your profit by $100 reduces your total capital gains tax liability.
This applies to losses as well, so if you bought shares of stock for $3,000 sold them for $2,000, and paid two $50 commissions, you'd have an $1,100 loss. You can use capital losses to offset other capital gains, so the loss on this stock could shelter $1,100 worth of profit on other stock sales. If you don't have any capital gains to cancel out, you can claim up to $3,000 per year of capital losses as a write-off against your regular income. Should you have more losses than you can use as an offset or write-off, you can even carry the extra losses forward to the future.
Other Investment Expenses
While you can't directly deduct commissions, you can write off other investment expenses if you itemize your personal deductions on Schedule A. The IRS lets you write off investment expenses, such as fees for investment advice, safe deposit box rental and investment management software. However, you can only write off expenses that, along with your other miscellaneous deductions, exceed 2 percent of your adjusted gross income.
If you're investing in a tax-advantaged account, such as a Roth or traditional individual retirement arrangement or a 401(k), your income is treated differently. When you take money out of a Roth IRA, the withdrawal is tax free, so there's no need to deduct commissions. On the other hand, when you take distributions from traditional IRAs, 401(k)s and other tax-deferred savings plans, you pay regular income tax on them. This means that your commissions reduce your taxable income and, with it, your regular income tax instead of your capital gains tax.
- Generation X Finance: Questions From Readers -- Can I Deduct Brokerage Commissions Paid to Trade Stocks for Tax Purposes?
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- Charles Schwab: Investment Expenses -- What's Tax Deductible?
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Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.