buying bond or CD under par

Well, that depends.

Was it bought as an IPO? Was its term for not more than one year?

Was it a US Savings bond?

Have you read the Original Issue Discount information in IRS Publication 550?

Yes, if it's de minimus. If it's too great of a discount then you have to impute OID each tax year.

Steve (not a tax professional)

FYI the de minimis amount for OID is 0.25% x Number of years between issue and maturity dates.

Thanks. I forgot to mention this was not an initial offering, but bought on the secondary market. A rather vital piece of information.

I have looked at Pub 550, and my question on this topic is this: under what circumstances would an individual have a capital gain when investing in bonds or CDs?

Gil Faver

In article , Gil Faver

I would fine-tune this to say, instead of accretion, "market discount/premium, or OID, that you have previously reported as interest income".

If you buy a taxable bond that is distressed, and it only becomes more distressed as you hold it, it is not accreting anything in an accounting sense. But in a tax sense, you may have to pay tax on the market discount anyway, the only exceptions being if it is de minimis, or trading flat, and even if you're never going to see any recovery of the imputed discount.

I have not heard of any argument that it works differently for junkier bonds with wide spreads. I expect a rash of such scenarios as we move further into the default cycle: tax due on payments never made by a bond that defaults.

Steve

In article , snipped-for-privacy@speedymail.org (Steve Pope) writes: | Seth wrote: | | > Your basis is the price you paid (not including accrued interest) plus | > (minus) accretion. | | I would fine-tune this to say, instead of accretion, "market | discount/premium, or OID, that you have previously reported as | interest income". | | If you buy a taxable bond that is distressed, and it only becomes | more distressed as you hold it, it is not accreting anything | in an accounting sense. But in a tax sense, you may have to pay | tax on the market discount anyway, the only exceptions being if it | is de minimis, or trading flat, and even if you're never | going to see any recovery of the imputed discount.

At what time do you pay the tax on market discount that is not de minimis?

| I have not heard of any argument that it works differently | for junkier bonds with wide spreads. I expect a rash of | such scenarios as we move further into the default cycle: | tax due on payments never made by a bond that defaults.

Does default of the bond accelerate payment of the tax on market discount?

Dan Lanciani ddl@danlan.*com

My last sentence quoted above is incorrect. I should not post so late in the evening. ;-) By my reading of Pub 550, you do not need to pay tax on the market discount until the bond is sold (or called, matured, or partly refunded) -- unless you have elected to do so, after which point (again by my reading of Pub 550) you must continue to do so, including for any other taxable bonds. But if you never make such an election I think you're in the clear, and market discount differs from OID in this respect.

Good question. I would think if the bond goes flat the TP would be justified not including any remaining market discount as income, and if it's finally sold at a low or zero recovery value the TP would be justified in not reporting any income that adds up to more than what's been recovered. But I don't know what's required.

Seems to me best to avoid this particular election.

Steve