Margin interest is deductible when you used the borrowed money to buy or hold taxable investments, you itemize on Schedule A, and the amount you claim does not exceed your net investment income for the year. Miss any one of those conditions and the deduction shrinks or disappears. The rule lives in Section 163(d) of the tax code, and the mechanics are worked out on Form 4952.1Legal Information Institute. 26 U.S.C. § 1632IRS. About Form 4952
What You Used the Borrowed Money For
The IRS applies tracing rules to margin loans. What matters is not that the loan is secured by your brokerage account, but where the cash actually went. If the proceeds bought taxable stocks, bonds, or mutual funds, the interest counts as investment interest. If they paid for a vacation, a car, a credit card balance, or tuition, the interest is personal and not deductible.3Legal Information Institute. 26 C.F.R. § 1.163-8T
Split the loan across purposes and you split the interest the same way. Keep records that show which dollars went where, because the tracing rules put that burden on you.3Legal Information Institute. 26 C.F.R. § 1.163-8T
Two uses are disqualified even when the money is genuinely invested. Interest on funds used to buy tax-exempt securities such as municipal bonds is never deductible, no matter how much investment income you have.4Office of the Law Revision Counsel. 26 U.S.C. § 265 And interest tied to a passive activity, like a rental you do not actively manage, is not investment interest at all; it falls under the passive activity loss rules instead.3Legal Information Institute. 26 C.F.R. § 1.163-8T
The Net Investment Income Cap
Even when the use is qualifying, you can only deduct investment interest up to your net investment income for the year. Anything above that ceiling is disallowed for the current year.1Legal Information Institute. 26 U.S.C. § 163
Investment income for this calculation includes ordinary items from your holdings:
- Interest
- Annuities
- Royalties
- Non-qualified dividends
- Short-term capital gains
Long-term capital gains and qualified dividends are not included by default, because they get preferential tax rates. You can elect to include them, which raises your deduction ceiling, but the trade-off is that the included amount is then taxed at ordinary income rates rather than the lower preferential rate.1Legal Information Institute. 26 U.S.C. § 163
Net investment income is that total minus allowed investment expenses. Many common investment costs, such as advisory and custodial fees, are currently not deductible for individuals, and because only “allowed” deductions reduce the figure, those non-deductible fees generally do not shrink your cap.1Legal Information Institute. 26 U.S.C. § 1635Office of the Law Revision Counsel. 26 U.S.C. § 67 The margin interest itself is not subtracted when figuring the cap.
A simple example: $15,000 of margin interest against $10,000 of net investment income means a $10,000 deduction this year and $5,000 pushed forward.1Legal Information Institute. 26 U.S.C. § 163
How to Claim It
Add up the margin interest reported on your brokerage statements for the year, then run the numbers through Form 4952. The form compares your investment interest expense to your net investment income and produces the smaller of the two as your deduction, along with any carryover.2IRS. About Form 4952
The result flows to Schedule A as an itemized deduction. That means the deduction only helps you if your total itemized deductions beat the standard deduction, which for 2025 is $15,750 for single filers and $31,500 for married couples filing jointly.6IRS. IRS releases tax inflation adjustments for tax year 2026
Interest You Cannot Use This Year
Disallowed interest is not lost. It carries forward indefinitely, and there is no cap on the number of years you can hold it before applying it against future investment income.1Legal Information Institute. 26 U.S.C. § 163
The tracking happens on Form 4952. Each year, last year’s disallowed amount is added to the current year’s investment interest, and the combined total is measured against the new year’s income limit.2IRS. About Form 4952
The IRS does not maintain a running tally of your unused interest. If you stop filing Form 4952, you can lose track of a carryover you were entitled to use. File the form in any year you have a balance, even if the current-year deduction is zero.2IRS. About Form 4952