Tax Write-Offs for Online Investors?

Kiplinger's Personal Finance Magazine, July, 1999 by Marc L. Schulhof

* Sorry, but it's unlikely that the IRS will help pay for your computer.

You're no day trader (yet), but you're heavily into, investing with Schwab Online, or E*Trade or Datek. Maybe you even bought a new, faster computer to support your habit. You should be able to write off that expensive machine because you're using it to make money that the IRS gets to tax, right?

Well, maybe yes and maybe no. It's certainly not as straightforward as deducting your mortgage interest. In the end, you may decide that the rigmarole isn't worth the meager payoff.

First, the cost of a computer used for investing is lumped into a tax category called miscellaneous expenses. Such costs are deductible only to the extent that the total exceeds 2% of your adjusted gross income. Granted, the miscellaneous category cuts a wide swath (tax-preparation fees and job-search expenses count), but 2% is a lofty cover charge. And think about it: The more successful you are at investing, the less you will be able to deduct--every $1,000 in profits raises the deduction bar by $20.

The second bug is this: The bill for your computer might smash your 2%-of-AGI threshold, but you can't claim the cost all in one year. Computer hardware must be depreciated over six years. (The special "expensing" rule that allows big, up-front deductions applies only to equipment used predominantly in a business.) And there's more. Did you go online to read a review of the new Audi TF coupe or otherwise figure how to spend your profits? To the extent you use your computer for anything other than researching stocks, making trades and the like, the deductible amount is scaled back. (You did keep a log of how you spent your hours in front of the screen, didn't you?)

DO THE NUMBERS ADD UP? All these stipulations add up to a very limited scenario for deducting a computer used as a window to Wall Street. For the sake of argument, though, let's say you're a player. You slap down your credit card for one of Gateway's most tricked-out machines with a 500MHz Pentium III processor, cavernous hard drive and 21-inch monitor. Add a laser printer and your hardware tab comes to $3,275.

Next you need Internet access ($240 a year), software to track your investments ($100) and maybe a subscription to E*Trade's service for analyst reports ($120).

So now your cash outlay totals in the neighborhood of $3,700. That would be a big deduction--worth about $1,040 to someone in the 28% bracket--if you could claim it all. But even if your computer is used only for investing, depreciating your hardware earns you an annual deduction of just $328 in the first and sixth years, and $655 in the middle four. Add $460 a year in Internet and software costs and you have $790 in miscellaneous expenses in the first year. If your AGI breaks $39,500, that entire amount would be lost to the 2% rule. Even in the middle years, a $1,115 deduction would be completely swallowed up by an AGI of $55,750.