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Q: Is it true that margin interest is deductible only against short-term, not long-term, gains? If so, should I try to have short-term gains equal to my margin interest?

A: Margin interest is an animal unto itself. Margin interest is treated as investment interest and falls under those rules. Investment interest is deductible up to the amount of net investment income received and is reported on Schedule A using Form 4952 as a back up computation. The definition of net investment income would include short-term gains, so no problems there. But with respect to long-term capital gains an additional decision must be made: You can either take the long-term capital gains as investment income (to be used to offset investment interest), but you would then lose the tax favored maximum 28% tax rate; or you can elect to have your long-term capital gains taxed at the maximum 28% rate, but then you could not use it as investment income in order to offset investment interest expense. A real one edge sword.

So, I guess dividends would be investment income that could be offest by margin interest? What about the interest my broker paid me when I had cash in my account? And is margin interest subject to the "miscellanious deductions" limits?

I received about $150 in dividends, paid about $5 in margin interest, and received about $12 in interest from my broker in 1999.

I'm only talking about a few dollars for 1999, but for 2000 it may be a real issue cuz I bought some stocks on margin in early January, intending to sell others at the end of the month and repay the loan. The recent market volatility was not kind to me, and I am keeping all the stocks and will repay the margin loan in a few months.

Thanks, and best regards,
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