An estate holds zero-coupon municipal bonds which are tax-free at federal and state levels. Their basis was reset on the Date of Death, and inheritance taxes were paid to the state based on their new values. Later, some of the bonds were sold for less than their value on the Date of Death. Is this considered a capital loss? Or is the loss amortized as a reduction in the interest paid? Any pointers to the relevant IRC or other authority would be appreciated.
