If you're an investor, there are several investment-related expenses that you can deduct on your personal income taxes, including your computer. You don't have to be a professional day trader, either; even casual and amateur investors who have full-time jobs elsewhere should keep careful track of their expenses. Although not every expense is deductible, many are – just be careful to keep fair and accurate records.
Your Personal Computer
The part of your computer that you use to research, plan and track your investments is tax-deductible. In addition to your computer hardware, you can also deduct the cost of software you purchased to help with your investments. If you used the Internet to invest, then you can deduct a portion of your monthly service provider's bill. Just be sure to keep accurate records; if you use your computer for other activities, then you'll need to note how much of your time is spent on investments. Your computer may also be subject to depreciation expense as well.
There are other deductions that investors can take, too. However much you spend getting investment advice is deductible, whether it's from a live professional or from a subscription to a business periodical. While many additional home office expenses are also deductible, such a furniture or even art for the walls, keep in mind that the Internal Revenue Service examines these costs very carefully, so be sure you qualify before taking this type of deduction. According to Smart Money magazine, if you're not careful, you might wind up paying more in taxes than you should if your home office deductions result in penalties.
There are big caveats to all of these deductions. First, any cost that results from a tax-free investment is not tax-deductible, even if you use your personal computer for planning and implementation. This is because a tax-free investment results in tax-free income. Also, the amount you pay in trading commissions isn't deductible either, because these costs are added to your basis when you report your investment's gain (or loss). Finally, your travel expenses to attend investment seminars and conventions aren't tax-deductible, either.
How it Works
Part-time investors can deduct hardware- and software-related expenses over time on Form 1040's Schedule A, assuming the expenses meet the 2-percent-of-adjusted-gross-income standard. Hardware such as your personal computer is subject to straight-line depreciation over six years, according to Smart Money. Deduct software over three years, generally speaking; however, if your software's useful life is shorter, then you can spread out the deduction over a shorter period or even all at once. If you're a self-employed part-time investor, consult a tax professional, because you could lose your deduction if it's not handled according to IRS rules. Full-time, "active" investors must deduct their expenses on Form 1040 Schedule C; keep in mind that you must pass the IRS's litmus test for active traders first.
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