I bought taxable corporate bonds that each have a premium and accrued interest. If I choose not to amortize the premiums, would I include that amount in the cost basis and report the sale as a capital loss on Schedule D? And since accrued interest is to be deducted from total interest income on Schedule B, would I do that in the year the bond is bought or when it matures?
you need to amortize the premium to the 1st call date
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Yes, the year the bond is sold or matures.
The year you receive the first interest payment.
Why would the premium have to be amortized? Isn't amortization simply an option I can elect that would allow me to reduce my taxes each year until the bond matures? Why can't I decline to amortize and thus pay more taxes each year and then when the bond matures I add the premium to the cost basis and take a capital loss? Where can I find the regulation that requires me to amortize the premium?
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