I understand these are different forms (Schedule D vs. Schedule A), but I'm looking for net benefit at overall tax level. Here is a simple example:
1) $10K worth of investment expense (margin loan)
2) $10K worth of ST cap gains
3) $10K worth of LT cap losses
#3 would offset #2 on Schedule D, therefore eliminating the marginal income tax on ST cap gains. But #2 would also allow #1 to be included on Schedule A itemized deductions, thus providing a double benefit. Is this accurate?
@steiny1227 wrote:1) The result of Schedule D (LT cap losses offsetting my ST cap gains) means I would own $0 net tax on cap gains.
Yes, and that is a problem unless you have other investment income (dividends, interest). Otherwise, your investment interest expense will be carried forward to the following tax year.
In short, you would need net capital gains given this scenario.
You are confusing concepts ... you cannot use cap gains to offset the margin interest on form 4952 UNLESS you wish to recharacterize them as ordinary income which means the cap losses will not be able to be used ... you cannot "double dip". https://www.irs.gov/forms-pubs/about-form-4952
To actually claim the deduction for investment interest expenses, you must itemize your deductions. Investment interest goes on Schedule A, under "Interest You Paid." You may also have to file Form 4952, which provides details about your deduction. You don't have to file this form if you meet three conditions: interest is the only investment expense you're deducting; you're not carrying forward any disallowed interest from the previous year, and your investment interest doesn't exceed your investment income from interest and ordinary dividends.
Critter-3 -
Thanks for the prompt response! I understand that Schedule A and D are different parts of the tax process, but Form 4952 limits the amount of investment expense I can actually deduct on Schedule A to net investment income (interest income + ST cap gains + ordinary dividends), so my question about double dipping comes down to this:
1) The result of Schedule D (LT cap losses offsetting my ST cap gains) means I would own $0 net tax on cap gains.
2) The result of Form 4952 is the $10K in ST gains would allow me to write off the full $10K in investment expense on Schedule A.
Without the investment expenses, I would have just had a net $0 tax bill from my stock trading activity, but in the case above my net benefit is actually a $10K itemized deduction. Does this make sense?
Thanks again!
@steiny1227 wrote:1) The result of Schedule D (LT cap losses offsetting my ST cap gains) means I would own $0 net tax on cap gains.
Yes, and that is a problem unless you have other investment income (dividends, interest). Otherwise, your investment interest expense will be carried forward to the following tax year.
In short, you would need net capital gains given this scenario.
Ah, ok - that does make sense. Form 4952 is very confusing because it does some separating out ST gains from LT gains, which I get because of the special tax treatment of LT gains, so to calculate net investment income I always assumed it was your full interest income, ordinary dividend income and ST cap gains (not your net cap gain), but what you describe prevents me from double dipping in the scenario I laid out. I will just have a big interest expense deduction carrying forward to future years. At least it carries forward indefinitely. Thanks.