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I checked my Form 4952 as prepared by TT. On Line 4f it works out short term capital gain by subtracting from the amount on Line 4d (which is the same as the total gain shown on Line 16 of Sch D) the amount on Line 4e (which in my case is the same as the net long term gain shown on line 15 of Sch D).

Line 4g is blank, so not opting to include long term capital gain. But on Line 6 it calculates Net Investment Income by adding 4c and 4f (and 4g which is blank), that is, short term capital gain is treated as part of Net Investment Income, at least for the purpose of calculating "Investment interest expense deduction".

This allows a much higher value of margin loan interest to be deducted as I happen to have quite large short term capital gains. Did TurboTax calculate the deduction correctly, by including my short term capital gain in the Net Investment Income?

I will be grateful for a confirmation. Thanks.

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Yes, in all cases short-term capital gains are investment income for purposes of the investment income deduction.

And you're evidently aware of the election to include long-term gains as well, as you indicate,
"Line 4g is blank, so not opting to include long term capital gain."
But did you try it both ways, to see which method gives you the lower tax? There's no real quick and easy method other than calculating the return both ways, with and without the election, to see which way your tax is lower.

Making the election to include some or all of your long-term capital capital gains in investment income will give you a bigger investment interest deduction. This will lower your taxable income. But the LT gains will not be taxed at a reduced rate. Which way works better depends on the rest of your numbers on your return, the exact numbers on your Schedule D, whether the larger deduction gets you to a lower bracket, etc. And the overall difference may or may not be significant, especially keeping in mind that the unused margin interest can be carried over.

Bill
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