Zero coupon municipal bonds maturation

Forum|Forum|7 years ago
June 1, 2019
14 replies
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In 1994, I purchased zero coupon municipal bonds. Over the years, tax free municipal bond interest has been imputed annually as the market value of the bonds increased.

These bonds matured in 2018 and my broker reported the maturation value on my 1099B. As a result, it appears that I sold securities for proceeds of $115K all at once.

TurboTax does not appear to be able to handle this. If I enter the original purchase price and the redemption price, I will incur a huge capital gain which is wrong on so many levels.

TurboTax Deluxe Windows

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MrBiggieSmalls

Level 2

Thanks for all the confirmations ... I will enter the details from my 1099B verbatim into my 8949 form.

ScruffyCurmudgeon

Alumni - Champ

Presumably, if done properly, your financial services statement on account showing the zero coupon bond will present a cost basis not of your original cost but added to that each of the imputed but not received interest amounts that accumulate over the life of the bond.

The following assumes that you purchased the zero coupon bond at issue time and not in the secondary market, as you did not indicate, nor did you indicate if the cost basis was adjusted after each imputed interest accumulation.

The tax rules for zero-coupon bonds bought as new issues and held to maturity are fairly simple.

Whether the bond is taxable or tax exempt, you (or your broker) have to accrue interest on the bond. That means you have to calculate the portion of the difference between the purchase price and face value that accrued to you each tax year, even though you didn't receive any payment. The interest accrues at the interest rate you obtained when you bought the bond. Using the earlier example, if you paid $500 for a 10-year, $1,000 bond getting an interest rate of 7.05%, you would accrue $35.25 of interest in the first year.

$500 x 0.0705 = $35.25

Your adjusted issue price, or cost basis, in the bond, would then become $535.25.

$500 + $35.25 = $535.25

The following year, you would accrue $37.74 of interest.

$535.25 x 0.0705 = $37.74

And so on.

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msdaltAuthor

Level 2

Details added to original query.

ScruffyCurmudgeon

Alumni - Champ

@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.

RobertB4444

Level 15

When you receive your 1099-B it will show the redemption of the bond with the amount that you were paid when the bond was called as the sales price.

The only thing that you will have to pay tax on is the profit earned on that bond redemption so in the next box should be the basis, or the amount you paid for the bond. In this case, the amount that you paid for the bond is the amount that you originally forked over plus all of the "non-taxable interest" that the bond earned while you held it.

If the sales price is larger than the basis then you have a capital gain. You'll pay tax on that.

If the sales price is smaller than the cost basis you have a capital loss. You get to deduct at least some of that on your tax return.

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