How to Deduct Brokerage Commissions from Your Taxes

Through stock market investments, it is possible to amass hundreds of thousands, if not, millions of dollars of wealth over the long term. Brokerage commissions and taxes, however, will subtract away from your bottom line and slow the wealth creation process. For relief, you may deduct brokerage commissions from your taxable income. To do so, you must first identify the proper paperwork and become familiar with how capital gains taxes are calculated.

Deducting Brokerage Commissions: Identify Tax Paperwork

At tax season, your brokerage will submit 1099 forms to both the Internal Revenue Service (IRS) and your address on record. You will reconcile 1099 information against your monthly brokerage statements to summarize your trading activity, in terms of profits, losses, and commissions. From there, you can complete IRS Schedule D alongside the 1040 form to report and pay taxes upon your realized capital gains. You will include brokerage commissions within your realized capital gains calculations.

Deducting Brokerage Commissions: Realized Capital Gains

When trading investments, you are likely to owe taxes on realized capital gains. Realized capital gains occur when you sell off an asset at a profit. For tax purposes, capital gains are classified into short and long-term capital gains. To qualify for long-term capital gains, you must own an investment for more than one year -- before selling it off. Your long-term capital gains are either tax free, or taxed at maximum 15 percent rates. Short-term capital gains, however, are taxed as ordinary income. For the 2010 tax year, ordinary income is taxed at 10, 15, 25, 28, 33 and 35 percent rates.

Deducting Brokerage Commissions: Cost Basis and Sales Proceeds

On IRS Schedule D, you will include brokerage commissions within your cost basis and sales proceeds. For example, you may trade shares of Retail Company Z through an online broker at $10 a trade. In January, you bought 100 shares of Retail Company Z at $50. Your cost basis on this transaction would then be $5,010 ($50 x 100 shares = $5,000 + $10 brokerage commissions = $5,010). Later that year, you sell off your Retail Company Z position for $75 a shares. Sales proceeds on that transaction would then be $7,490 ($75 x 100 shares = $7,500 - $10 brokerage commissions = $7,490). That year, you would owe taxes on $2,480 worth of short term capital gains.

Deducting Brokerage Commissions: Realized Capital Losses

You will also include brokerage commissions within losing investments that result in capital losses. For the 2010 tax year, you can deduct $3,000 worth of realized capital losses away from your taxable income. Losses that exceed the $3,000 cap can be carried forward as deductible expenses in subsequent years. Be advised that the IRS prohibits wash sales -- for the sole purpose of taking a realized capital loss. A wash sale occurs when you sell a stock and immediately buy back the same stock within 30 days.

Deducting Brokerage Commissions: Strategy

You ultimate goal is to invest to make the most amount of money for the least amount of risk. Doing so does not always translate into a minimal tax bill. For example, you should not trade excessively or hold on to a losing stock -- for the sole purpose of securing a large tax write-off.

How to Deduct Brokerage Commissions From Your Taxes, Sources:

IRS: Capital Gains and Losses

IRS: 10 Facts About Capital Gains and Losses

IRS: Investment Income and Expenses

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