Question on Municipal Bonds

You have to amortize that 3k over the lifetime of the bond. This has the effect of reducing your tax free income (which often makes no difference, but may reduce the taxable portion of social security, etc), and increasing your capital gains if you sell the bonds or they are recalled before maturity.

The "extra $3K" doesn't really exist as a separate item. Your cost basis was simply $53K -- and that's what you should note in your financial records. If, at some future time, you dispose of the bonds, the $53K will play a role in determining the amount of your gain, or your loss.

Otherwise, if you hold the bonds to maturity, and you finally retrieve the face value of $50K, then that's it. You paid a premium for the good yield, and you did so in an open market: your choice.

Consider this: If you bought the bonds for $47K, because yields were temporarily higher when you bought them, would you like to report the $3K as a "capital gain" in the year they mature?

Bill

I don't really understand your answer. But, Pub 550 says for taxable bonds you can elect to amortize the premium (so I guess if you don't elect this, it is LTCL); it says for tax-exempts, you MUST amortize the premium.

On Sep 11, 3:03 pm, "Gil Faver" you can elect to amortize the premium (so I guess if you don't elect this,

Yes, but this thread is about muni bonds, which are tax-exempt (or at least all the ones I've seen are). If it is a taxable bond and you choose to not amortize, then you do get to take a capital loss or smaller capital gain, but you have to also declare the full interest. If you chose amortize, then your capital gains are increased or capital loss becomes closer to a capital gain, but you do get to deduct the amortization from the interest.

Yes. Now how does the post by Bill fit in with any of this?