I use my margins to trade many ETFs which include some muni ETFs (such as MUB). I heard that I can't deduct margin interests on muni ETFs since they produce tax free income, is that true? The problem is that I have thousands of trades done for the year. The 1099 from my broker (IB) only shows the total margin interests for the entire portfolio without breaking down the portion that goes to the muni ETFs. How do we figure out the amount of margins that were used for the muni ETFs, so that I get subtract that from the total amount, in order to get to the margin interest amount that's deductible? Thanks.
That's a good reminder on separating out margin for muni ETFs. I think most of us have had that moment where we realize, holy crap, how did I manage to do that many trades and that poor of a job of record keeping! The onus is on you, not your broker, to track that. Deductibility of margin expense is all considered customer side record keeping, they couldn't care less about it. Ideally you'd be able to recreate you daily account balance, margin loan amount, and percentage of the portfolio in a tax free ETF, and do the math to pro-rate it. Barring that, you can always just estimate what it would be, then double your estimate in the IRS' favor and if you ever get audited the error would only serve to reduce your taxes. For me, it would turn out that the money I lose on doubling the estimate would be $x and the value of my time recreating the pro-rate would be 5*x so I'm better off with $x no matter how much it hurts to give extra to the IRS.
A beginner's guide to investing in municipal bond ETFs. ... Third, you can buy them on margin or sell short. ... Moreover, in regards to the tax code, during the past 100 years the government has decided not to tax interest on tax-exempt muni .