Many clients, especially retired clients, take an active role in managing their own investments. If you fall in this category, you may be able to deduct the cost of subscriptions to financial periodicals, clerical expenses, etc.
Most taxpayers will deduct such expenses as production-of-income expenses which are deductible only as itemized deductions and thus are subject to the 2% floor on miscellaneous itemized deductions. However if you meet certain criteria, you may be able to these expenses as business expenses in arriving at adjusted gross income.
Deducting Investment Expenses as Businesses Expenses
To deduct investment-related expenses as business expenses, you must be engaged in a trade or business. The Supreme Court held many years ago that an individual investor isn't engaged in a trade or business merely because he or she manages their own securities investments, regardless of the amount of the investments or the extent of the work required.
However, taxpayers that are considered to be traders are able to deduct their investment-related expenses as business expenses. A trader is also entitled to deduct home-office expenses if the home office is used exclusively on a regular basis as his or her principal place of business.
Since the Supreme Court's decision, there has been extensive litigation on the issue of whether a taxpayer is a trader or investor. The Tax Court has developed a two-part test that must be satisfied in order for a taxpayer to be a trader. Under this two-part test, a taxpayer's investment activities are considered a trade or business only where both of the following are true:
the taxpayer's trading is substantial (i.e., sporadic trading won't be a trade or business), and
the taxpayer seeks to profit from short-term market swings, rather than from long-term holding of investments.
So, the fact that a taxpayer's investment activities are regular, extensive, and continuous isn't in itself sufficient for determining that a taxpayer is a trader. In order to be considered a trader, a taxpayer must show that he or she buys and sell securities with reasonable frequency in an effort to profit on a short-term basis. Even a taxpayer who made over 1,000 trades a year with trading activities averaging about $16 million annually was held to be an investor because the holding periods for stocks sold averaged about one year.
For most investors, investment-related expenses are treated as a miscellaneous itemized deduction subject to 2% of AGI. If the investor meets the two-part criteria noted above, the investment-related expenses are treated as a business deduction from AGI.
If you have questions regarding your investment-related expenses, consult a qualified tax professional.