1

Let's say I purchase a share of a stock for $10 and the the broker charges me a $5 commission fee.

A year later I purchase a second share for another $10 and the broker charges me again a $5 commission fee.

A year later I sell both shares for $30 each and the broker charges me again another $5 commission fee.

I get that in the first and second year I get to deduct the $5 commission fee from other sources of income since I didn't realize any gains on those years; but what happens on the third year?

On the third year I realized $20 in short-term capital gains, realized $20 in long-term capital gains, and incurred $5 in broker expenses. What income do I deduct those $5 against? Short-term or long-term capital gains? They are taxed at different rates, so it makes a difference. What about other expenses? Interest paid on margin balances? Account maintenance fees? Fund expense fees?

3

You don't "deduct" transaction fees, but they are included in your cost basis and proceeds, which will affect the amount of gain/loss you report.

So in your example, the cost basis for each of the two lots is $15 (10$ share price plus $5 broker fee). Your proceeds for each lot are $27.50 (($30*2 - $5 )/2). Your gain on each lot is therefore $12.50, and you will report $12.50 in STCG and $12.50 in LTCG in the year you sold the stock (year 3).

As to the other fees, in general yes they are deductible, but there are limits and exceptions, so you would need to consult a tax professional to get a correct answer in your specific situation.

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