Secondary market Treasury security transactions can be pretty complicated, maybe even more than other types of bonds.
I think they are subject to the de minimis rule which determines if the accrued market discount should be treated as interest or as a capital gain. Don't know if TT handles this for you or not. Theoretically it could once you enter the data.
Also, you can opt to report the accrued market discount annually or at maturity. If you report it annually you have a choice of methods to calculate the amount to report. I wouldn't try this unless you study it very carefully. But it is an important decision you need to make between deferring the tax on the market discount or reporting it annually.
Also if you sell the bond before maturity it becomes even more difficult because any gain attributable the accrued market discount will be interest and any gain (or loss) attributable to market forces will be treated as a capital gain or loss. So gains may be treated two different ways for tax purposes.
Also there is different tax treatment depending on if the gain was short term or long.
Also there is a difference in the way different types of Treasury securities are handled for tax purposes. A Note and a Bill for instance are treated very differently. (Note that the subject of this thread mentions both Bills and Notes, but the tax treatment of each is different so one answer doesn't necessarily fit both.)
This is a complex topic and you need to be sure you are comparing your situation to the same example in all respects or the answers as to the tax treatment can be different.
The specific example I am trying to find out the answer to is this and pretty straightforward:
If you:
(A) Buy a US Treasury Note on the secondary market for a discount and;
(B) Hold it to maturity then redeem it and;
(C) Have determined that the entire accrued market discount is to be reported as interest on your federal return then;
The Question: Is that interest tax exempt in the state of New York.
I actually have a CPA because I have several returns I have to prepare including several 1041 trust returns. I can ask him this question, but his answers are not always reliable. So I want to find out the answer myself in advance of asking him to see if the answers match and to make sure he handles it right for the trusts.
I do my personal returns with TT.
Notes:
* While researching this I saw a page somewhere online from what I believe was a California tax attorney's website who said that in the case above that California does NOT exclude this interest from taxation. Sorry don't remember where I saw it. Also don't know if is reliable or not so sorry this is of limited help but thought I'd mention it anyway.
*I plan to call the NY tax helpline too but I consider them the least reliable (if you can even get through).
I would love to get an answer to this from an expert. Very hard to find information about it.
PS: What Edition of TT are you using that allows you to enter box 1f on the 1099-B? Thanks.
