Would like to get additional opinions on this. I’m also consulting my tax professional. Amounts discussed will be greater than the standard deduction so that is off the table. Am single, in the US and pay no state income tax

Over the course of the year I am looking to realise capital gains on some volatile assets that I have been holding for some time. Am I right in that every dollar of margin I interest I pay equates to one less dollar of income so long as that loan is used to generate taxable income?

If I am right in that, my plan is to take high interest margin loans to reduce my taxable income this year. If I lose any capital that my loan goes towards, I would simply realise more gains from my held assets. If I make money on these investments then I would just realise less of my gains on my assets during this tax year and do this again next year.

My thinking is that the capital itself will be placed into an ETF so my expected volatility is quite low. If I win it’s fine. If I lose I am just able to realise more gains from my held assets. My gains at this point cover the annual interest by several dozen times. Is this a sound strategy or am I missing something obvious here?

For the sake of discussion let’s say I can live with the potential downward volatility

Interest from a loan used to purchase investment property is generally considered a deduction from AGI. Capital gains and losses are offset against each other with 3k max net loss deducted for AGI; additional losses carried forward. You're saying you're paying >$12.4k in interest this year from margin accounts? I dunno how margin affects this, maybe someone else can chime in.

My understanding is if you borrow 100k at 12.4% interest per annum, and in that year you generate 100k in net capital gains and realize them, you pay STCG rate for 87.6k in gains (effectively).

This is my understanding of the situation. My plan would be to not realise the gains from the margin loan, but to roll over and continue to use the itemised loan as a way to reduce my liability whilst I realise gains in my older assets

If they're STCG, one reason to hold on for a year is you're significantly decreasing your tax burden when they convert to LTCG. Increased risk with holding onto your leverage, and those interest payments are eating away at your gains. Lots of variables to consider, but it'd be relatively simple to do the optimal math, whatever your actual numbers are.

I suppose the perspective I'd like checked is that I don't mind the risk of the margin itself that much as I see it as an opportunity to realise more tax advantaged gains from the assets that I'm currently looking to close

I see this likely playing out in a way that the margin investments will all be subject to LTCG as my exit strategy for the asset I'm looking to close may take a few years once I've mapped out what's optimal for me

Margin + other itemised deductions > realise gains on asset I want to close up to what puts me in a favorable tax bracket > repeat

Increasing expenses (margin interest) in order to lower tax liability seems like a losing game. The point is not to pay less in tax, it is to have more $$ in the end.

Paying less tax usually results in more money in the end. So long as your ROI is higher than your interest, you'll be farther ahead with leverage than without. It's just more risky.

I do agree that it takes a special situation to 'gamble' like this but maybe OP has one.

Then this is just a math problem.

^^ Exactly.

Isn't margin interest only deductible if you are a professional trader?

No. If your loan goes towards something that generates taxable income it qualifies for deduction

You can only deduct margin interest to the extent of your investment income (which, for this calculation, generally doesn’t include long-term capital gains). So I don’t think your plan will work unless you have a lot of dividends or short-term capital gains taxed at normal income tax rates.

Alternatively, you can sell SPX box spreads for even cheaper borrowing rates, and the interest is fully deductible as a capital loss, and you don’t have to itemize/don’t lose the standard deduction. See: https://www.reddit.com/r/wallstreetb...ely_cheap_085/

A long/short strategy can also help generate extra capital losses to offset gains. See: https://alphaarchitect.com/2017/12/2...rt-strategies/

My investment income being greater than my interest won’t be a problem this year. SPX box looks viable. I have access to 1% apr at the moment and 12k though significant, will be a very small percentage of what I’d claim / intend to be deducted this year

Had a chat with a cpa today and we played with numbers ranging from 1-9% and he seemed pretty cavalier about me bearing 9% apr. Waiting for my main cpa to give me some additional info before I decide

The CPA is saying even with 9% interest on the margin loan you would come out ahead? I would highly doubt that -- you would have to have a lot of unavoidable short-term gains and make very aggressive assumptions about double-digit market returns going forward.

I thought the same when he spoke cavalierly about needing 15% roi. I’ve settled on closer to 1% than 9% in any case