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Discussion Starter #1
Is margin interest expense always tax deductible, or only if you use it to invest?

If it's only if you invest,

1. You have $5000 worth of equities in your brokerage account. You withdraw $1000 from the account to buy some really expensive candy, putting you -1000 into your margin. The interest on that $1000 is not tax deductible.

2. You have $5000 worth of equities in your brokerage account. You sell $1000 worth of the equities. You withdraw the proceeds to buy the aforementioned candy. Then you rebuy the $1000 worth of equities, putting you into -1000 of your margin. The interest on that $1000 is tax deductible.

Is that right?
 

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It is all about intent. Did you make the loan with the intent of investing? If you made $1000 and then took the money and blew it, that would be OK. But the gain has to be documented.
 

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Case 1 sounds like it is certainly not deductible.

Case 2 applies if there is not outstanding margin balance.


Generally, you can't withdraw cash without compromising the deductibility of the margin interest unless what you withdraw is income, ie dividends, interest. Apparently capital gains doesn't count as income in this case, and must be used to repay any loan. Intuitively, this doesn't make sense to me, but it's what I've gathered from experts.
 

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...Apparently capital gains doesn't count as income in this case, and must be used to repay any loan. Intuitively, this doesn't make sense to me, but it's what I've gathered from experts.
Right. I am not sure how closely they monitor it? Can anyone add to this?
 

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Discussion Starter #5 (Edited)
Generally, you can't withdraw cash without compromising the deductibility of the margin interest unless what you withdraw is income, ie dividends, interest. Apparently capital gains doesn't count as income in this case
What if you you use the dividend to buy more stocks in the account? Could you sell the stocks later and withdraw the proceeds if the amount withdrawn is not greater than the original cost basis?
 

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I think the question has been framed in a confusing manner. In a taxable account, generally margin loan interest is deductible if the loan is used to invest.

Example:
I deposit $5000 cash in my taxable margin account. I borrow $5000 on the margin and invest in $10,000 in equities. Later (like a month or more later), if I sell $1000 of securities for no capital gains/losses and spend it, and I don't repay any of the margin loan, I believe the interest on the $5000 I borrowed is still fully deductible.

Intentionality does matter. Timing may tell something about intentionality. If I deposit $5000 in my taxable margin account, borrow $5000 from my broker, then turn around immediately, withdraw the whole amount and go on an expensive vacation, then the margin interest is not deductible since I did not use the loan to invest. I don't think my broker would necessarily let me get away with that either.
 

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great points Robillard, plus the broker would then call the account and either sell investments or take collateral. either way it would suck as you would pay tax on gains or incur losses since your timing was out of your control.

but i would advise the OP to buy as much useless candy as possible. it makes us all relatively more wealthy...

may i suggest a brand new car? they smell so good.... the payments are so low... you can pick your own colour!!
 
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