The main topics of this lesson are: US Treasury Bills; Corporate & Municipal Bonds; and Bond Premiums and Discounts. For this lesson refer to the Study Notes and watch the video for a synopsis.
Capital gains/losses on bonds work in essentially the same manner as stocks and other securities. Tax
lots apply as does first in, first out sales rules, unless a special purchase is identified. There are a few
differences to be aware of and this lesson touches on those.
US Treasury Bills
US Treasury Bills are sold at a discount and do not pay interest (coupon) during their life. The difference
between the price paid and the face value of the bond is interest. There is no gain or loss at maturity.
Rather the difference is interest income and is reported as such on your tax return. It is also reported in
this manner on your 1099 information reporting at year-end.
A tax compliance tip: Even though an item has no gain or loss, the sale, or in this case redemption, must
be reported on your tax return. Brokers’ information reporting will include zero gain/loss items and even
though they have no impact on tax liability, they must be reported as the IRS looks to match the broker submitted reporting to your tax return submission. Failure to report these items will generate IRS –
CP2000 notices requesting additional information and possibly tax from you.
The treatment of corporate bonds for calculating gain or loss is exactly the same as the treatment for
stocks. Keep in mind that the maturity of a bond is a disposal of the holding and must be reported.
We think of muni bonds as always being federally tax-free and, and if they are from your resident state,
state tax-free. Not quite. Capital gains and losses on these bonds are subject to both federal and state
tax when sold or held to maturity. Interest income is exempt from federal taxes, and state taxes if you
are a resident of the state the muni was issued by.
Bond Premiums and Discounts
Bond premiums and discounts are added to and subtracted from the cost basis of a bond over the life of
a bond. Bonds purchased after January 1, 2013 are covered securities and therefore your broker will
provide the necessary information to you. Bonds purchased before this date require more record-keeping on the part of the taxpayer. The cost plus or minus any market discount or premium amortized
over the holding period of the bond is the simplest calculation of the basis.
Disclosure: Interactive Brokers
The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.
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Disclosure: Tax-Related Circular 230 Notice
The information in this presentation is provided for informational purposes only, and does not constitute tax advice and cannot be used by the recipient or any other taxpayer to avoid penalties under any federal, state, local or other tax statutes or regulations, or to resolve any tax issue.