@msdalt01 you wrote:
"The bond was slightly more than three years old when purchased and, in 1994, reporting requirements for the brokerage were not as comprehensive as they are today. I don't think that the imputed interest was reported for the first two decades or so.
Should I adjust the cost basis to include all imputed interest, meaning that the basis = the redemption price, considering that this is a Municipal bond and there should not be tax associated with the growth of my investment due to tax free interest?"
Yes, possibly with the help of the bond issuer or its custodian, for your own benefit so as to reduce the cost basis to eliminate the apparent but illusionary
gain (
which would be taxable even though the bond is tax-exempt), you must produce the updated cost basis by calculation of the imputed interest that was allocated over the years from when you purchased the bond, given that your purchase cost established your initial cost basis before you began receiving the benefit of the unpaid but imputed interest.
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