Terms of Use:
When you borrow money and use the proceeds to buy taxable investment assets, the resulting interest is called investment-interest expense. The most common example: interest on broker-margin accounts.
You can deduct investment interest to the extent of your taxable investment income — from interest, dividends, short-term capital gains, certain royalties and the like. If you don't have enough investment income, the excess interest expense gets carried over to the following tax year. Hopefully, you'll have enough investment income in that year to claim your write-off. If not, the carryover procedure happens all over again.
You can also choose to treat all or part of your long-term capital gains as investment income. The upside of making this choice is that it allows you to currently deduct more of your investment-interest expense. The downside is the amount of long-term gain treated as investment income gets taxed at your regular rate instead of the normal 20%.