Are Margin Loans Tax Deductible? Limits, Elections, and AMT

Margin loan interest is tax deductible, but the rules are narrow enough that many investors get little or nothing out of it. The IRS classifies it as investment interest expense, which means three things have to line up in the same year: you itemize deductions, you have net investment income to absorb the interest, and you can show the borrowed money actually went into taxable investments rather than personal purchases or tax-exempt bonds.¹

The Net Investment Income Ceiling

Your deduction for margin interest in any given year cannot exceed your net investment income for that year.² Pay $10,000 in margin interest against $7,000 of net investment income and you deduct $7,000 this year. The other $3,000 doesn’t disappear — it carries into next year and is treated as interest paid then. There’s no expiration on that carryforward, so it keeps rolling until you finally have a year with enough investment income to soak it up.

What Counts as Investment Income

Investment income for this calculation includes taxable interest, ordinary dividends, royalties, annuity income, and short-term capital gains from investment property.² Tax-exempt income, like municipal bond interest, is excluded.³

Two big categories sit outside the calculation unless you affirmatively pull them in: long-term capital gains and qualified dividends. Because those already enjoy preferential rates of 0%, 15%, or 20%, the tax code keeps them out of the pot by default. There’s an election to include them, discussed below, and it isn’t free.

Net investment income is technically gross investment income minus investment expenses. In practice, the Tax Cuts and Jobs Act suspended the deduction for those miscellaneous investment expenses starting in 2018, and the One, Big, Beautiful Bill Act made the suspension permanent.⁴ For most investors, net investment income now equals gross investment income.

What You Did With the Money

The IRS doesn’t care what secures the loan. It cares what you spent the loan on. Under the interest tracing rules in Treasury Regulation 1.163-8T, interest is allocated based on how the borrowed proceeds were used.⁵

Borrow $50,000 on margin and buy stock: investment interest, potentially deductible. Borrow $50,000 on margin and buy a boat: personal interest, never deductible, even though a taxable brokerage account is still standing behind the loan. Split the money — half stock, half boat — and you split the interest, deducting half and losing half.

The burden of proof is entirely yours. Keep brokerage statements, trade confirmations, and any bank records that show a clean line from the margin borrowing to the investment purchase. If you can’t trace the proceeds, the default treatment is nondeductible personal interest, and the whole deduction can be reclassified on audit.

Uses That Kill the Deduction

Some uses of margin loan proceeds are dead ends for deductibility no matter how well you document them.

Debt used to buy or hold tax-exempt securities produces no deductible interest.⁶ Borrowing on margin to buy municipal bonds is the textbook case — the tax code will not let you deduct the cost of generating income it has already made tax-free.

Proceeds spent on personal expenses generate personal interest, full stop. Paying off a credit card, funding a vacation, or covering a car down payment with margin money makes the interest nondeductible, no matter how large the collateral portfolio.

Margin borrowed to fund a passive activity, such as a limited partnership where you don’t materially participate, isn’t investment interest at all. It follows the passive activity loss rules, which generally allow those losses to offset only passive income.⁷ Treating that interest as investment interest is a common misclassification.

One boundary worth flagging for options traders: interest and carrying charges on debt used to purchase or carry personal property that’s part of a straddle can’t be deducted currently. They have to be capitalized into the basis of the straddle property instead.⁸ The rule doesn’t reach hedging transactions.

The Capital Gains Election

An investor with heavy margin interest and thin ordinary investment income has a lever: electing to treat some or all long-term capital gains and qualified dividends as ordinary investment income. That raises the ceiling on the deduction. The election goes on Form 4952, line 4g.⁷

The catch is that any amount you elect in loses its preferential rate. Elect to include $10,000 of long-term capital gains while you’re in the 24% bracket and that income now costs 24% instead of 15%, an extra $900 of tax on that slice alone. For the election to pay off, the additional margin interest deduction it unlocks has to save more tax than the reclassified income costs.

The math tends to favor the election when your margin interest expense meaningfully exceeds your ordinary investment income and you have a sizable realized capital gain in the same year. Run it both ways before filing. The election generally has to be made on a timely filed return, though you can make it on an amended return filed within six months of the original due date (excluding extensions) by writing “Filed pursuant to section 301.9100-2” on the return.⁷

Alternative Minimum Tax

If you’re subject to the AMT, you’ll compute investment interest twice. Fill out Form 4952 once under regular rules and a second time under AMT rules, then report the difference on Form 6251, line 2c.⁹ Any capital gains election you made carries through, but the underlying income and expense numbers can shift under AMT rules, so the two calculations aren’t identical.

How to Actually Claim It

The deduction is calculated on Form 4952, which walks through your investment income, your interest expense, the cap, and any carryforward from prior years.⁷ The allowable amount then flows to Schedule A (Form 1040), line 9.¹

Because it’s an itemized deduction, it only helps if your itemized deductions clear the standard deduction. For 2026, the standard deduction is $16,100 for single filers and $32,200 for married couples filing jointly.¹⁰ Mortgage interest, state and local taxes, charitable gifts, and investment interest all combined have to beat that number before margin interest saves you a dollar this year. If they don’t, the disallowed interest still carries forward to a future year when itemizing may make sense.

Most individual investors use the cash method, so margin interest is deductible in the year it’s actually paid. That includes years the broker collected dividends or sold securities to cover the charge — those count as payment.¹ Interest that has accrued but hasn’t been paid or made available by year-end waits for the following year.

Your brokerage will show margin interest charged on the year-end account statement or the consolidated tax reporting package. It doesn’t come on a separate information return, so pulling the right figure onto Form 4952 is on you. Hold onto the statements, the trade confirmations, and anything else that ties the borrowing to the investment. That paperwork does double duty: it supports the numbers on the form and satisfies the tracing rules if anyone asks how you spent the money.

1
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
2
Office of the Law Revision Counsel. 26 USC 163 – Interest
3
Internal Revenue Service. Instructions for Form 8960 (2025)
4
Office of the Law Revision Counsel. 26 US Code 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
5
eCFR. 26 CFR 1.163-8 – Allocation of Interest Expense Among Expenditures
6
Office of the Law Revision Counsel. 26 US Code 265 – Expenses and Interest Relating to Tax-Exempt Income
7
Internal Revenue Service. Form 4952, Investment Interest Expense Deduction
8
Office of the Law Revision Counsel. 26 US Code 263 – Capital Expenditures
9
Internal Revenue Service. 2025 Instructions for Form 6251 – Alternative Minimum Tax—Individuals
10
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026, Including Amendments From the One, Big, Beautiful Bill