convetible note, tax questions

[frankf2]

Two questions are given below. Thank you!

1) Is it correct that the conversion of a convertible note for stock of the note’s issuer does not result in realized gain or loss because it is not treated as a taxable exchange?

2) Is it correct that the purchase of convertible debt is not a taxable event to the holder?

[DaveF1006]

Yes, generally the conversion of a convertible note does not result in a realized gain or loss and is not a taxable gain. There may be exceptions if Certain adjustments to the conversion ratio are made. This is because the adjustments may have the effect of increasing a convertible note holder's proportionate interest.  This can result in a deemed distribution to the convertible note holder even though no cash is actually distributed.

The purchase of convertible debt is not a taxable event to the holder unless he/she transfers appreciated or depreciated property in exchange for the debt.