In investing, as in much of life, smart folks know that they don't know everything. Fortunately, there are a lot of ways to get an investment education, and the cost of that education may be tax deductible. Exactly what you deduct and how you do it depends on your IRS trading status.
Stock trading educational activities can fall into one of three categories, depending on your level of trading. The majority of people fall into the "investors" category: average people who trade regularly, but who do so as investors. This means you trade for long term asset appreciation and to grow your savings, but trading isn't your primary activity. Some people fall into the "traders" category: those who trade frequently or daily, trade on short term price changes and use trading as a primary source of income. Finally, there are "students": people whose trading education is the primary goal, and who will use that education to further their careers. Note that these categories aren't exclusive -- you may belong to more than one at any given time. If that is the case, your tax deductions should still be segmented by activity type.
Investors can take a deduction for stock trading education if they choose to itemize all tax deductions. The tough part is coming up with deductions large enough in value -- for tax purposes, investment education falls under "miscellaneous" and is subject to a 2 percent floor. This means you can only write off those expenses that exceed 2 percent of your adjusted gross income. Educational expenses include things like magazine and newsletter subscriptions and the non-travel related costs of taking classes or attending conferences. These expenses can be bundled with other miscellaneous expenses like advisory fees on taxable accounts, work-related expenses and tax preparation fees. Investors take these deductions on Schedule A of the 1040 form.
If you qualify as a trader for IRS purposes, any education you undertake is a business expense. This gives you a lot more flexibility, as you can deduct not only the cost of conferences, classes and subscriptions but things like travel, food and lodging as well. You must make certain your trading activity is substantial -- it must take up a significant portion of your time with a goal of profit -- but once you do, you can deduct expenses for your trading education on Schedule D of the 1040 form.
If you are a student -- full or part time -- you may qualify for a different set of deductions and even some tax credits. Educational assistance for students is specific to institutes of higher learning -- colleges and universities -- and helps to cover the cost of tuition and room and board. Educational deductions vary with income and total school hours, so review IRS Publication 970 to learn which programs and deductions apply to you.
- "SmartMoney"; Taxes on Day Trading; January 2011
- Charles Schwab; Investment Expenses -- What's Tax Deductible?; Rande Spiegelman, CPA, CFP; June 2011
- IRS.gov: Publication 520 -- Miscellaneous Deductions
- IRS.gov: Publication 550 -- Investment Income and Expenses
- IRS.gov: Publication 970 -- Tax Benefits for Education