Can I deduct the interest paid on a personal loan I took out to purchase stocks or mutual funds in 2025?

The ability to deduct interest paid on a loan used to purchase stocks or mutual funds in 2025 depends entirely on how the IRS classifies that interest expense. Interest paid on a personal loan taken out to buy investments is generally classified as Investment Interest Expense, not a general personal interest deduction.

### Investment Interest Expense Rules

Investment Interest Expense is the interest paid or accrued during the tax year on indebtedness properly allocable to property held for investment. Stocks and mutual funds are considered investment property.

• Deductibility Limit: You can only deduct the amount of Investment Interest Expense up to the amount of your Net Investment Income (NII) for the year. NII includes taxable interest, ordinary dividends, royalties, and net short-term capital gains from investment property.
• Non-Deductible Portion: If your investment interest expense exceeds your NII, the excess expense is not deductible in the current year. This disallowed amount can be carried forward indefinitely to future tax years, where it can be deducted against future Net Investment Income.
• Qualified Dividends and Long-Term Gains: Importantly, Net Investment Income does not include qualified dividends or long-term capital gains, even though these are investment income items. If your NII is composed entirely of qualified dividends or long-term gains, your investment interest deduction for that year will be zero, although the expense can still be carried forward.

### Classification of the Loan

Even if you took out a standard personal loan (not a margin loan directly from a brokerage), the IRS requires you to trace the use of the funds. If you used the proceeds to purchase securities, the interest paid on that loan is treated as Investment Interest Expense, subject to the NII limitation.

### Reporting

Investment Interest Expense is calculated and reported on Form 4952, Investment Interest Expense Deduction. The deductible amount flows to Schedule A (Itemized Deductions) as a miscellaneous itemized deduction subject to the 2% AGI floor (though miscellaneous itemized deductions subject to the 2% floor have been suspended through 2025 by the Tax Cuts and Jobs Act).

Crucially, due to the suspension of most miscellaneous itemized deductions and personal interest deductions through 2025, the only way to deduct investment interest expense is if it is offset by Net Investment Income, and then it is reported on Form 4952.

IRS Reference: Publication 550 provides detailed rules on the investment interest expense limitation under IRC Section 163(d).