The Internal Revenue Service has no single rule governing all brokerage fees and brokerage-related expenses. You can deduct some brokerage fees, subject to the 2 percent rule, but others you cannot. Many of the fees you can't deduct you can add to the tax basis of your investment, which reduces your capital gains liability when you sell the investments. Others, however, are not deductible at all.
The 2 Percent Rule
Although the IRS treats brokerage fees and expenses in several different ways, depending upon the particular fee or expense, one general rule governs them all -- the 2 percent rule for miscellaneous deductible expenses. IRS Publication 529, "Miscellaneous Deductions," explains that a variety of miscellaneous expenses -- deductible brokerage fees and expenses among them -- can be deducted from your gross income on your Form 1040's Schedule A. However, only that portion of the total of miscellaneous expenses in excess of 2 percent are deductible. If you have gross income of $100,000 and miscellaneous expenses of $3,000, for example, you may only deduct $1,000 of those expenses. For tax purposes, gross income is the amount on line 37 of your Form 1040 or on line 38 of your Form 1040NR.
Deductible Brokerage Fees
Subject to the deductible limits of the 2 percent rule, you may deduct investment advisory fees, including subscriptions to financial publications, as well as investment-related attorney, accounting and clerical costs.
You may also deduct charges for automatic investment services, dividend reinvestment plans and fees imposed for brokerage services, such as the cost of replacing lost security certificates.
Software or online service expenses are also deductible, but you must prorate them according to their use. For instance, if you have a cell phone and use it about 5 percent of the time to obtain stock market and stock account information, you may deduct 5 percent of the monthly service provider fee.
Individual retirement account and Keogh custodial fees are also deductible but only if paid outside the account; if you write a check to pay them, you can deduct the amount. If the brokerage takes it directly from your account, you may not.
Investors may assume that brokerage transaction fees -- the trading commissions and related fees charged by your broker whenever you buy or sell an equity -- are deductible, like many other brokerage fees. They are not. Instead, you must capitalize them by adding them to the cost basis of the equity. When you sell the equity, the increased cost basis reduces your capital gain, thereby reducing the capital gains tax.
Partially Deductible Fees
You may not deduct fees on tax-exempt investment income. An approximate calculation that the IRS accepts is to total all your investment fees, then divide this by the result of tax-exempt income divided by all income. If you have investment fees of $6,000 and total investment income of $75,000, of which $25,000 is tax exempt, you divide $25,000 by $75,000, and multiply the result -- 1/3 -- by $6,000. Thus $2,000 of your investment fees are nondeductible and $4,000 are deductible.
The IRS allows you to deduct travel expense to your brokerage office but does not allow you to deduct travel costs associated with attendance at a shareholders meeting.