My 1099-B this year include an Accrued Market Discount on a bond that was sold. It increased my cost basis. Do I need to add it to my interest income -- on top of the interest income that was reported on 1099-Int?
If yes, why is that number not automatically be included on the 1099-Int? [I didn't change brokerage firm between the purchase and sale of that bond.]
TIA
Be careful. The reported discount might not even be correct. The broker might not know your basis. For example, you might have sold the same bond at a loss and purchased this one within 30 days, creating a wash sale and affecting the basis.
Assuming that the figure is correct, you are required to report the discount as ordinary income either as it accrues annually or in toto when you sell the bond. The broker doesn't know which you selected, so it can't include the total accrued discount on the 1099-INT.
Here's the Pub 550 paragraph on reporting sale of Market Discount Bonds:
replying to Mark Freeland, chasegar wrote: What if your 1099B shows accrued market discount on the sale of a tax-exempt municipal bond? The amount seems to reduce my capital gain from the sale, but do I have to include it as taxable interest? It would seem more logical to include the accrued market discount on line 8b of form 1040 as tax-exempt interest.
Hi Mark,
Could you please explain why Accrued Market Discount increase the cost basis?
I have bought a bond at 4`900$ and it was redemeed in 4 months at 5`000$, so I have 100$ gain. Broker adds 20$ of Accrued Market Discount into 1099-B which TurboTax subtracted from the gain, so I have only 80$ taxable income. Why I should pay less?
-Mikhail.
Take a look at Schedule B, line 1. You should see that TurboTax added a line with the bond name followed by Accrued Market Discount and the amount of $20. (At least that's what shows up when I test this.)
TurboTax is doing automatically what I described above. It is saying that (as reported by your broker) $20 of the $100 you received is interest, the rest is gain.
You want to look at Publication 550 (the most recent version of which is for 2017). Unfortunately it is very lengthy but it does say:
"When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income. If you do not make this choice, the following rules generally apply."
Then goes on to say how you report it if you chose not to accrue the market discount.
(This is a change from the past, in which you must accrue the market discount except in de minimus situations, so it is a actually a simplification.)
So you will want to look at how it was reported starting from the year in which you bought the bond, then follow the instructions.
My recollection is that, going back in time, brokerages would report OID but not market discount and a TP would have to calculate and enter the market discount manually.
Steve
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