How are Capital Losses on Municipal Bonds Treated?

[w-pb-ober]

I have a Municipal Bond which I purchased at a premium mature. How are Capital Gains on Municipal Bonds treated for Tax purposes?

[Matilda]

I see this is from 2 years ago but I have a question so I will try to just comment here and see what happens.  I have a muni bond that matured in 2011 and was redeemed in 2016.  It did not pay interest over the life of the bond, just at maturity.  The only form received was a 1099B.  We did not receive any 1099-OID during the life of the bond, or at redemption.  

So - we need to report tax exempt interest without receiving any 1099-OID on this bond ever.  How do I do this? I will of course set the 1099B basis to the redemption value so have no gain from1099B I just think I need to report the interest income on the bond even though it is tax exempt.

[TomYoung · Accepted solution]

Capital gains and losses on Muni bonds are treated exactly like capital gains and losses on any other securities.

-----------------------------------------------------------------------

Capital Gains and Losses

Even though the interest paid on a municipal bond is tax-exempt, a holder can recognize gain or loss that is subject to federal income tax on the sale of such a bond, just as in the case of a taxable bond. The amount of gain or loss is equal to the difference between

1. the sale price of the bond and
2. the holder's tax basis in the bond (the amount the holder paid for the bond originally, including any additions to such basis, such as OID as discussed in the following section).

- See more at: http://www.investinginbonds.com/learnmore.asp?catid=8&subcatid=60#sthash.4yZ3tdc7.dpuf

-----------------------------------------------------------------------

Tom Young

[Matilda]

I figured out what works - I hope-.  I first tried turbotaxes guide me path for the 1099b and entered the accrued interest so set the basis to amount of bond.  But TT put the interest on schedule B as taxable .  So I went back and entered the information for 1099 B myself and just put in the correct basis - also had to pick category so picked long term non covered.  Then I went to schedule D and entered the interest in the OID section.  This works and I hope it is an ok way to do it even though I have no 1099 OID.

[jdadverb]

Pretty sure this is incorrect with respect to taking losses on muni bonds. You have to amortize any premium and cannot take a normal capital loss on a muni bond.

[tunverzagt]

You don't have to amortize. You can choose to amortize or not but whatever you choose you to have to stick with.

BUT I agree that this information is incorrect. Buying bonds at a premium or discount is considered "interest". The buy price is high because you will get more interest from the "old" bond than from a new bond. Therefore the premium is considered prepaid interest, not a capital premium.

Same with the discount in reverse. The price is down because you will get less interest while you hold it until maturity than you would on a new bond. Therefore you pay less for the buy to make up for the lack of interest. It's considered interest instead of cap gains.

Amortizing it reflects the annual interest you would have gotten if you bought a new bond at a higher price to begin with. But the IRS allows you to wait and realize all the interest when the bond matures if you like. 

This isn't how Intuit's tax program is set up though. The programs do allow you to amortize correctly but you have to manually enter interest if you realize the interest at maturity.