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Selling the Stocks and ETFs When You Have Borrowed to Invest
If you have purchased good quality stocks or exchange-traded funds (ETFs), we recommend that you hold them forever (buy and hold). When you sell any investment, you will have to pay tax on any capital gains, lowering your return on investment.
If you sell all or part of an investment that you have purchased with borrowed money (leveraged investments), you should repay the borrowed money, as the interest on that portion of the debt will no longer be tax deductible. Example of our suggestion to keep record-keeping simple:
 | Borrow $10,000 and invest in an ETF. | ||||
| Pay only the interest each month. | ||||
| Transfer any dividends less interest to another account. | ||||
| When the investment has reached a market value of $12,000, a sale is done for $2,000 of the ETF. | ||||
| The cost basis of the investment sold is 2,000/12,000 x 10,000, or $1,667. | ||||
| The capital gain is 2,000 - 1,667, or $334. This amount must be reported on your tax return. | ||||
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The $1,667 should be used to pay down the debt,
because the interest on this amount is no longer deductible.
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The above is just a suggestion for how to do this - certainly not a rule!
Note that if you have sold a stock at a loss, the interest expense may still be deductible - see our article on Disappearing Source Rules.
Previous Borrow to Invest Articles:
Setting up the brokerage account
Tax Tip: Repay the borrowed money if you sell your leveraged investments. Better yet, hold them forever.
Revised: September 20, 2024