Portfolio Deductions: Interest, Capital Losses, and Foreign Taxes

For individual investors, the list of investment costs you can still deduct is shorter than it used to be, but it isn’t empty. Investment interest expense, capital losses, foreign taxes withheld on dividends, and bond premium amortization all remain deductible in some form. Advisory fees, custodial charges, research subscriptions, and most other portfolio management costs are permanently non-deductible. That is the short answer to which investment costs are deductible; the rest of this article walks through each surviving deduction and the rules that govern it.

What You Can No Longer Deduct

Before 2018, investment-related expenses were deductible on Schedule A to the extent they exceeded 2% of adjusted gross income. The Tax Cuts and Jobs Act suspended that deduction through 2025, and many investors assumed the write-off would return in 2026. It won’t. The One Big Beautiful Bill Act of 2025 added Section 67(h) to the tax code and made the elimination permanent.¹

The costs that are gone for good include:

Investment advisory fees, whether flat or based on assets under management
Custodial and account maintenance fees paid out of pocket
Investment newsletters, databases, and market research subscriptions
The portion of tax preparation fees attributable to investment reporting
Safe deposit box rental, even when used only for investment documents
Investment seminars, conferences, and education

These costs now come entirely out of after-tax dollars. If your advisor charges 1% of assets under management, none of it reduces your federal tax bill. Some states do not conform to the federal change and still allow these deductions on state returns, so check your state’s rules if you itemize at the state level.

Investment Interest Expense

Interest you pay on money borrowed to buy taxable investments is still deductible. That includes margin interest at your broker and interest on any other loan whose proceeds went into a taxable investment account.² You claim it on Schedule A, so it only helps if you itemize.

Your deduction each year is capped at your net investment income. Net investment income means interest, ordinary dividends, royalties, annuities, and short-term capital gains, minus investment expenses other than interest. Qualified dividends and long-term capital gains are excluded from that pool unless you elect on Form 4952 to treat them as ordinary investment income.² Making that election frees up more interest to deduct, but the affected dividends and gains lose the preferential rate. Run the math both ways.

Any interest you can’t deduct because of the cap carries forward with no expiration, subject to the same cap in future years.³ Report the calculation on Form 4952 and attach it to your return.

Tracing Beats Collateral

The IRS allocates interest based on what you did with the borrowed money, not what secures the loan. Pledge your stock portfolio to finance a car, and the interest is nondeductible personal interest. Take an unsecured personal loan and use every dollar of it to buy taxable stocks, and the interest is investment interest.⁴ A single loan used for mixed purposes must be traced, and only the investment portion generates deductible interest.

It Also Reduces the NIIT

Investment interest you deduct on Schedule A also flows through to Form 8960 and reduces the income subject to the 3.8% Net Investment Income Tax, which applies once modified AGI passes $200,000 single or $250,000 joint.⁵⁶ For higher earners, the deduction saves regular tax and the surtax in the same stroke.

Capital Losses

Losses on stocks, bonds, mutual funds, and other capital assets remain fully usable. Short-term losses first offset short-term gains, long-term losses offset long-term gains, and whatever remains crosses over to offset gains of the other type.⁷

If losses still exceed gains after netting, you can deduct up to $3,000 of the net loss against ordinary income like wages. Married filing separately drops that to $1,500. Anything left carries forward indefinitely, keeping its short-term or long-term character, until you’ve used it up. Report the calculation on Form 8949 and Schedule D.

The Wash Sale Rule

Sell a security at a loss and buy a substantially identical one within 30 days before or after the sale, and the loss is disallowed. The disallowed amount gets added to the basis of the replacement shares, so it isn’t lost forever, but you can’t recognize it until you dispose of those replacement shares in a transaction that isn’t itself a wash sale.⁸ The rule reaches across accounts, including IRAs, so a loss sale in your taxable account followed by a replacement purchase in your IRA within the window still triggers disallowance.

Harvesting losses to offset gains is a legitimate strategy as long as you respect the 61-day window. If you want to stay invested in the same market segment, buying a similar but not substantially identical fund (say, swapping one S&P 500 fund for a different provider’s total market fund) generally avoids the rule.

Choosing Which Shares to Sell

When you own shares of the same security bought at different prices, specific identification lets you tell your broker which lot to sell. That controls whether the sale produces a gain or a loss and how big it is. If you don’t identify shares, the default is first-in, first-out, which often doesn’t give the best tax result.⁹ Most brokerages let you set a default method in your account settings.

Worthless Securities and Small Business Stock

A security that becomes completely worthless generates a capital loss as if you sold it for zero on the last day of the year it became worthless.¹⁰ Total worthlessness is a higher bar than a severe price drop. The company must have no assets, no ongoing business, and no realistic prospect of recovery. A 95% decline in market price doesn’t qualify.¹¹

Losses on qualifying small business stock under Section 1244 get better treatment. If you bought the stock directly from a small corporation (generally one that received no more than $1 million in total capital contributions for the stock), up to $50,000 of loss per year ($100,000 joint) is ordinary rather than capital.¹² Ordinary loss treatment is much more valuable because it offsets regular income without the $3,000 annual cap.

Foreign Taxes Paid on Investments

When a foreign country withholds tax on your dividends or interest, you can either claim a foreign tax credit or deduct the taxes on Schedule A. The credit is almost always the better choice. A $500 credit erases $500 of U.S. tax; a $500 deduction might save $120 or so, depending on your bracket. You can switch approaches year to year.

If total foreign taxes for the year are $300 or less ($600 joint) and all of them were reported to you on Forms 1099 or Schedule K-1, you can take the credit directly on Form 1040 without filing Form 1116.¹³ Above that threshold, Form 1116 is required, and the credit is capped at the U.S. tax attributable to foreign-source income. Excess credit carries back one year and forward ten.

Bond Premium Amortization

Buy a taxable bond for more than face value, and you can elect to amortize the premium over the bond’s remaining life. Each year’s amortization reduces the taxable interest income you report from that bond, giving you a deduction without a cash outlay.¹⁴ The election applies to every taxable bond you hold now and every one you buy later; you can’t apply it selectively, and it’s binding unless the IRS lets you revoke it.

For tax-exempt municipal bonds, premium amortization is mandatory and doesn’t produce a deduction. It reduces your basis instead. For taxable bonds, making the election usually reflects the economics correctly: part of every coupon payment is really a return of the premium you paid, not new income.

If You Trade as a Business

Investors report expenses under the miscellaneous itemized deduction rules, which is why most portfolio costs are now gone. Traders in securities—people whose trading activity rises to the level of a trade or business—report expenses on Schedule C, where data feeds, trading software, home office costs, and market research are fully deductible against trading income.¹⁵ The deduction comes out above the line, so it works whether or not you itemize.

The IRS bar for trader status is high. The activity must be frequent, regular, and substantial, holding periods must be short enough to profit from daily price swings, and you must devote significant time to it. Quarterly rebalancing of an index-fund portfolio does not qualify. Commissions still aren’t a business expense even for a trader; they go into the basis of the securities bought. Trading gains and losses aren’t subject to self-employment tax.¹⁵

Qualifying traders can also elect mark-to-market treatment under Section 475(f). Gains and losses become ordinary, which means losses aren’t capped at $3,000 a year—a trader with $200,000 of losses can deduct all of it against other income. The trade-off is losing the long-term capital gains rate on winners and having to mark open positions to market at year-end. The election is due by the original due date of the prior year’s return and is binding for future years unless the IRS consents to revocation.¹⁶

Rental Real Estate Expenses

Rental property runs on a different track from stock and bond portfolios. Expenses go on Schedule E and reduce rental income directly, without the miscellaneous itemized deduction rules touching them.¹⁷ Deductible costs include mortgage interest, property taxes, insurance, property management fees, maintenance and repairs, tenant advertising, and any utilities you pay as the landlord. Improvements that add value or extend useful life must be capitalized and depreciated. Residential rental buildings depreciate over 27.5 years, producing a non-cash deduction each year.

Passive Activity Loss Limits

Rental real estate is generally passive, and passive losses can’t offset wages or portfolio income.¹⁸ The main exception: if you actively participate in managing the rental, you can deduct up to $25,000 of rental losses against non-passive income. That allowance phases out between $100,000 and $150,000 of modified AGI and drops to zero for married filing separately taxpayers who lived with a spouse at any point during the year.¹⁹ Unused passive losses carry forward and are released in full when you dispose of the property in a fully taxable transaction.

The Qualified Business Income Deduction

Rental income can also qualify for the Section 199A deduction of up to 20% of qualified business income, which the One Big Beautiful Bill Act permanently extended. The IRS safe harbor for rentals requires at least 250 hours of rental services per year across your properties (counting time by employees, contractors, and property managers) and contemporaneous recordkeeping.

A Note on Qualified Opportunity Zones

Qualified Opportunity Zones offer deferral and potential exclusion of capital gains rather than a deduction against income, so they belong in a different bucket. Reinvest a capital gain into a Qualified Opportunity Fund within 180 days and you defer tax on that gain, but the deferral ends no later than December 31, 2026, when any remaining deferred gain becomes taxable whether or not you’ve sold the QOF.²⁰ Hold the QOF for at least ten years and the appreciation on the QOF itself is never taxed—basis steps up to fair market value at sale. If you have a deferred gain from an earlier year, the 2026 recognition date is worth planning around now.

1
Office of the Law Revision Counsel. 26 USC 67 – 2-Percent Floor on Miscellaneous Itemized Deductions
2
Internal Revenue Service. Publication 550 (2025), Investment Income and Expenses
3
Internal Revenue Service. Form 4952 (2025) – Investment Interest Expense Deduction
4
eCFR. 26 CFR 1.163-8T – Allocation of Interest Expense Among Expenditures (Temporary)
5
Internal Revenue Service. Topic No. 559, Net Investment Income Tax
6
Internal Revenue Service. Instructions for Form 8960
7
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
8
Office of the Law Revision Counsel. 26 USC 1091 – Loss From Wash Sales of Stock or Securities
9
Internal Revenue Service. Stocks (Options, Splits, Traders) 1
10
GovInfo. 26 USC 165 – Losses
11
eCFR. 26 CFR 1.165-5 – Worthless Securities
12
Office of the Law Revision Counsel. 26 USC 1244 – Losses on Small Business Stock
13
Internal Revenue Service. Instructions for Form 1116 (2025)
14
Office of the Law Revision Counsel. 26 USC 171 – Amortizable Bond Premium
15
Internal Revenue Service. Topic No. 429, Traders in Securities (Information for Form 1040 or 1040-SR Filers)
16
Office of the Law Revision Counsel. 26 USC 475 – Mark to Market Accounting Method for Dealers in Securities
17
Internal Revenue Service. Topic No. 414, Rental Income and Expenses
18
Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
19
Internal Revenue Service. Instructions for Form 8582 (2025)
20
Internal Revenue Service. Opportunity Zones Frequently Asked Questions