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I am probably going to start using margin with the limited balance I do have. I only think using margin is marginally better than taking out a loan though. For the most part, margin is just a fancy term for what I was doing but seems to be a socially acceptable way of putting it. Although I can deduct the margin interest from my gains, I also would not have full control over those funds (margin calls).
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Two points based on my reading of IRS publication 550 (pages 32-38)
LINK :
1. For federal income tax purposes, you can only deduct margin interest from your gains if you itemize your deductions.
2. The source of the borrowings doesn't matter. If you borrow money for investment purposes, the interest may be deductible. It doesn't appear to matter whether you're borrowing from your broker or from others (e.g., your proposed prosper.com loan.)
Saving is a good idea. Investing in a good idea. Borrowing to invest can be a good idea, but nothing in this thread has suggested that borrowing to invest is a good idea for you.