Margin interest is the interest you pay to the brokerage house for the loan they gave you to buy stocks on margin. Is it deductible?

Q: Is it true that margin interest is deductible only against short-term, not long-term, gains? If so, should I try to have short-term gains equal to my margin interest?

A: Margin interest is an animal unto itself. Margin interest is treated as investment interest and falls under those rules. Investment interest is deductible up to the amount of net investment income received and is reported on Schedule A using Form 4952 as a back up computation. The definition of net investment income would include short-term gains, so no problems there. But with respect to long-term capital gains an additional decision must be made: You can either take the long-term capital gains as investment income (to be used to offset investment interest), but you would then lose the tax favored maximum 28% tax rate; or you can elect to have your long-term capital gains taxed at the maximum 28% rate, but then you could not use it as investment income in order to offset investment interest expense. A real one edge sword.

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