(1) TP bought a tax-free municipal bond mutual fund in 1993, selling it in 2008. During this interval all dividends paid by the fund were re-invested (and were reported as tax-free interest on Page 1 of form 1040), and capital gains internal to the fund were reported as income on the appropriate form.
Is the basis of the fund be the sum of the original purchase price, plus the tax-free interest, plus the capital gains? Are there any subtleties involved beyond this?
(2) TP bought in the secondary market a tax-free, zero coupon municipal bond, then sold it a couple years later before it matured. The broker has not reported any OID associated with this bond.
Research determines this zero was a stripped component of a bond issued at 4% coupon on a certain date. Is it acceptable to calculate that the basis of this bond is the purchase price, plus an OID amount calculated as follows:
OID = (face amount) * (1/(1.04 ^ T1)) - 1/(1.04 ^ T2))
where
T1 = number of years (including fractions) from sale date to maturity data
T2 = number of years (including fractions) from purchase date to maturity data
^ is the power operator.
The above formula makes sense to me (from a bond investor perspective), but is a method like this good to use for tax purposes, or is some other method preferred/required?
Steve