Deducting Commissions

Did you know that you can (and should) deduct commissions paid to brokerages from your net capital gain for tax purposes?

The expenses incurred in purchasing or selling a capital asset -- stock, in this example -- are capital expenses, and you're required to add or subtract them from the basis (or cost, for tax purposes) of the stock.

Let's say you buy $3,000 of stock and pay $50 in commission and other charges. Your actual cost is $3,050. You sell the stock later, when it's worth $4,000, paying another $50 to the brokerage. Your "net" sales price, or proceeds (generally, the amount reported to you by your broker at year-end on your Form 1099B), would be $3,950 ($4,000 less $50). On your tax return, you would report a gain of $900 ($3,950 less $3,050 equals $900.)

Note that you haven't had to pay tax on that $100 in commissions -- so you've probably saved between $15 and $35 in taxes. This might not seem like that much, but if you have 10 such transactions in one year, that's as much as $350. In 10 years, it would amount to $3,500. Small sums add up.

Learn more in our Tax Center and our Tax Strategies discussion board.

If you're paying too much in commissions, shop around to see whether you can do better. A few minutes in our Broker Center may help you find a brokerage that will serve your needs better and cost you less than your current brokerage. This article on finding the right brokerage may be helpful. Indeed, some very reputable brokerages now charge commissions of $5 or less per trade. (Our comparison table may be particularly helpful.)

Longtime Fool contributor Selena Maranjian appreciates your feedback.