If you're paying a premium for real-time quotes or other online broker services, you may have a deductible expense. It depends on your status as a trader, the IRS said. Professional traders can deduct any and all business expenses, including platform fees, while nonprofessionals have a few deductions available to them -- but only if they itemize.
Platforms and Fees
The Internet has given rise to a bustling online trading business, shared among hundreds of providers. Brokerages of all sizes can leverage online trading platforms into premium services, provided for customers willing to pay a fee for real-time quotes, analytic graphics, alerts and professional rankings of selected investments. The bells and whistles are tailored to professional traders and those willing to devote more time to their technical research and "due diligence" on publicly traded companies.
Professional vs. Nonprofessional
The IRS said only professional traders can write off expenses such as platform fees. To be recognized as a professional, you must trade on a regular and substantial basis, in your own accounts, and with the intention of earning a profit from short-term swings in the market price of securities. This would exclude an ordinary investor who "buys and holds" in search of long-term capital gains, who owns a self-directed IRA account, or who trades only on an occasional basis. If you use a fee platform to do research purely out of personal interest, you can't take the deduction; you must be running a securities-trading business.
Professional traders report their trading profits as ordinary income, not as capital gains, so there is no limit on the offset to income provided by trading losses. In addition, a pro can deduct travel expenses, office expenses, books, classes, software, organization dues and fees, as well as Internet and cell phone subscriptions, as long as they are used in the business.
Deductions for Nonprofessionals
If you are a nonprofessional trader, other investment expenses are deductible, including any interest you pay on margin loans secured by your stocks. The IRS allows investment advisory fees, legal fees, tax advisory fees and clerical help as miscellaneous itemized deductions, subject to the 2 percent rule -- the sum of all these expenses must exceed 2 percent of your adjusted gross income. The deduction is figured on Schedule A. If your broker charges a fee or commission to carry out a trade, you add that to your cost basis when figuring the capital gain (or loss) on the subsequent sale.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.