Are Brokerage Commissions Tax Deductible?
- When investing money, you are generally responsible for paying taxes on realized capital gains. Realized capital gains occur when you sell an investment at a profit. As of 2010, realized capital gains are categorized as short-term or long-term capital gains. Short-term capital gains are taxed at ordinary income rates of 10, 15, 25, 28, 33 or 35 percent. Long-term capital gains are either tax-free, or taxed at maximum 15 percent rates. To qualify for long-term capital gains, you must own an investment for more than one year. You will attach IRS Schedule D to Form 1040 to report and pay taxes on your realized capital gains.
- When calculating realized capital gains, you will include brokerage commissions within your cost basis, which will result in a lower tax bill. Brokerage commissions are effectively deducted when an investment is sold, and not when it is bought. For example, you may open up an online trading account that charges $10 in brokerage commissions per trade. Through the account, you buy 100 shares of Corporation Z at $50 per share, before selling Corporation Z stock at $80 within the next year. The cost basis for your purchase would be $5,010 ($50 x 100 shares = $5,000 + $10 brokerage commissions = $5,010). On the sale, you would also subtract brokerage commissions away from your total proceeds. Cash proceeds on the sale would be $7,990 ($80 x 100 shares = $8,000 - $10 brokerage commission = $7,990). As a result of these transactions, you would owe taxes on $2,980 in realized capital gains.
- You may deduct $3,000 worth of realized capital losses from your taxable income each year. Capital losses that exceed $3,000 can be carried forward and deducted from taxable income in future years. Again, you can include brokerage commissions within your cost basis when calculating realized capital losses. Be advised that the IRS prohibits wash sales -- for the purpose of deducting realized capital losses. A wash sale occurs when you sell a stock at a loss and immediately buy the same stock within 30 days.
- When investing money, your ultimate goal remains to earn the highest returns for the least amount of risk. Earning a high investment return does not always translate into saving money on taxes. For example, you should not trade frequently simply to incur deductible brokerage commissions. You could miss out on significant long-term profits -- due to your frequent trading. Further, you should not hold onto a losing stock simply to deduct larger losses.