Short Sale Borrowing Fees

Forum|Forum|4 years ago
March 27, 2022
4 replies
0 views

Included on my 1099 are account fees described as "Short Sale Borrowing Fees". This fee is in addition to any margin interest paid. Are short sale borrowing fees paid to a broker tax deductible? If so, should I increase my basis in the stock sold short to reflect the true cost of the short position or does the fee get deducted somewhere else?

fanfare

Employee

what box?

There is no box on 1099-B for fees.

Investment fees charged by your broker are no longer deductible.

Mike9241

The new law effective for 2018 -2025 disallows the deduction of "2%" miscellaneous itemized deductions including “expenses for the production or collection of income.” That list does not include short-selling expenses. Section 67(b) excludes certain deductions from the “2-percent floor on miscellaneous itemized deductions;” including (8) “any deduction allowable in connection with personal property used in a short sale.”

Because investment fees and expenses are no longer deductible, some accountants might consider a Section 266 election to capitalize investment management fees as “carrying charges” to deduct them from capital gains and losses. But that won’t work: The IRS said taxpayers could not capitalize investment management fees under Section 266 because they are managerial rather than transactional.

Short-sellers probably could capitalize borrow fees under Section 266 because they are transactional. However, it’s safer to deduct these short-sale costs as “Other Miscellaneous Deductions” on Schedule A (Itemized Deductions) line 28. The new tax law suspended the Pease itemized deduction limitation, so the deduction has full effect on lowering taxable income. One concern: The IRS lists all Section 67(b) exclusion items in the instructions for Schedule A line 28, but it left out (8) for short-sale expenses. The code has substantial authority, and it’s reasonable to conclude that Schedule A instructions for other miscellaneous deductions on line 28 are not an exhaustive list.

Stock borrow fees
Short selling is not free; a trader needs the broker to arrange a loan of stock.

Brokers charge short sellers “stock borrow fees” or “loan premiums.” Tax research indicates these payments are “fees for the temporary use of property.” Watch out: Some brokers refer to stock borrow fees as “interest expense,” which confuses short sellers.

For tax purposes, stock borrow fees are “other miscellaneous deductions” on Schedule A line 28 for investors. Borrow fees are business expenses for traders qualifying for trader tax status (TTS). Borrow fees are not interest expense, so investors should not include them in investment interest expense deductions on Schedule A line 14.

MAC18Author

Thank you. That is very helpful. I will report my short sale borrowing fees as a miscellaneous deduction on line 28 of schedule A. I will not add them to my basis in order to lower my taxable capital gain. Interesting that this fee is allowed to be deducted but ADR sponsor fees are not.

fanfare

Employee

Please tell me where I can learn about Schedule A line 28, which does not exist.

Mike9241

@MAC18 as you can see no one can say for sure whether the borrowing fees are deductible or not. there may be a ways to resolve this and

contact the IRS tax advocate in your state

request a private letter ruling. there are fees and you would likely need a pro to prepare it.

https://www.moneycrashers.com/private-letter-ruling-plr/

https://www.irs.gov/irb/2021-01_IRB#REV-PROC-2021-1

reserve_currency

Here's my reply in another thread. I'm also trying to get clarification on this.

Why isn't a short borrow fee considered a cost, like a commission that a broker charges to buy/sell a stock? IRS says cost basis is any cost incurred in the transaction of the the asset. The IRS would then get their money by taxing the fees that the broker made.

So wouldn't you adjust your cost basis to include the borrow fee and then include Form 8949 to show why you adjusted the cost basis of the stock?

DaveF1006

Yes, a borrow fee should be should be a cost that should be added to the cost basis of the stock. To report this correctly:

Go to the stock sales portion of your return.
After the information is added, there is a screen that says "Let us know if any of these Situations Apply to this Sale"
Here you will check, I paid sales Expenses that aren't included in the Sales Proceeds reported on the form.
There will be a drop down where you will enter the broker fees.
once this done, there will be an entry that will automatically populate in your 8949 with a code adjustment E. i have included a screenshot that illustrates what this should look like on your 8949.