Margin loan interest deduction for crypto purchase

Forum|Forum|2 years ago
July 3, 2023
2 replies
0 views

I took out a margin loan against my equities to purchase crypto.

Can I deduct the margin loan interest that I am paying towards the loan on my taxes?

Thanks.

TurboTax Home & Biz Windows

Best answer by zz181

Thank you, Mike.

But the margin loan was secured using my equity position held at an external institution.

I borrowed money against my equities held at institution A and then used those funds to purchase crypto at another institution. This is what I am getting at. Does this still count?

Mike9241

Level 15

Notice 2014-21 provides useful principles that can be applied to crypto transactions involving the use of margin. Under the Notice, cryptocurrencies are treated as property for federal tax purposes. Thus, gain or loss on the sale of cryptocurrencies is reported as a capital gain or loss with the tyre short-term vs long-term determined by the holding. Short-term If held one year or less or long-term if held more than one year.

Taxpayers may deduct investment interest only to the extent that such interest does not exceed net investment income for the taxable year (IRC 163(d)(1). “Investment interest” means interest paid or accrued on indebtedness properly allocable to property held for investment and generally includes margin interest IRC 163(d)(3)(A); Miner v. Comm’r, T.C. Memo 2003-39. Any investment interest that cannot be deducted in a taxable year because of this limitation may be carried forward to the succeeding taxable year.

if it is investment interest it gets reported on schedule A using form 4952. this requires that you itemize your deductions rather than taking the standard deduction. if you take the deduction is lost and there is no carryforward. This applies to investors in crypto.

it would seem active cryptocurrency (coin) traders can qualify for trader tax status (TTS) to deduct trading business expenses and home-office deductions on schedule C. https://greentradertax.com/cryptocurrencies-trader-tax-status-and-section-475-issues/ What does it take to be classified as a trader?

here's one opinion on what it takes to achieve TTS status for crypto.

Here are the GreenTraderTax golden rules for qualification based on an analysis of trader tax court cases and years of tax compliance experience.

– Volume: three to four trades per day. Don’t count when the coin exchange breaks down an order into multiple executions.
– Frequency: trade executions on 75% of available trading days. If you trade five days per week, you should have trade orders executed on close to four days per week.
– Holding period: The Endicott court required an average holding period of fewer than 31 days.
– Hours: at least four hours per day, including on research and administration.
– Taxable account size: material to net worth, and at least $15,000 during the year.
-Intention to make a primary or supplemental living. You can have another job or business, too.
– Operations: one or more trading computers with multiple monitors and a dedicated home office.
– Automation: You can count the volume and frequency of a self-created automated trading system, algorithms or bots. If you license the automation from another party, it doesn’t count.
– A trade copying service, using outside investment managers and retirement plan accounts don’t count for TTS.

zz181AuthorAnswer

Level 4

Thank you, Mike.

But the margin loan was secured using my equity position held at an external institution.

I borrowed money against my equities held at institution A and then used those funds to purchase crypto at another institution. This is what I am getting at. Does this still count?

Opus 17

Level 15

@zz181

The interest can be eligible for the investment, interest deduction, but now you have to worry about what are called the tracing rules. Put simply, you have to be able to trace the dollars of interest from the cryptocurrency investment back to the prior loan, and be able to prove that the dollars of interest that you want to deduct as an investment expense are actually traceable to the investment.

The loan can really come from anywhere as long as you can trace it. For example, a home equity loan, or even a credit card loan. Suppose you borrowed a large cash advance from a credit card and use it to buy an investment. Then you put the credit card in a drawer, and never use it for anything else. It is very easy to allocate or trace the interest directly to the investment. But, suppose that after taking the cash advance on the credit card, you continue to use the credit card for clothing and pizza and food and gasoline and everything else. Then it becomes very difficult to allocate the interest to the investment compared to the other purchases.

In short, if you borrow using investment A as collateral and use the money to purchase investment B, the interest can be deductible interest against investment B as long as you can trace or allocate the interest paid on investment A back to the purchase of investment B, and that you can prove this if audited.

Opus 17

Level 15

Interest that you pay to purchase investments is a deductible interest expense on form 4952. It is an itemized tax deduction on schedule A, and it is one of the few itemized tax deductions that was not eliminated in the tax reform act of 2017.

However, the amount of the deduction is limited to the amount of income you report from those investments. If you are holding the cryptocurrency, and have not sold it, so you have not realized the capital gains, you will have no actual interest deduction. However, you still report the interest on form 4952 so it carries forward year to year, and you can take the deduction when and if you sell the investment for a taxable capital gain.