I was wondering what's the correct way to report on the tax return the loss from the tender / mandatory exchange of corporate bonds in a company that went through bankruptcy restructuring, held longer than 1 year, and purchased at market discount on the secondary market? It happened about 1 year before the maturity date.
The bonds were tendered / exchanged for some cash and a few shares in the restructured company. I believe this was mandatory. The aggregate value of the cash and shares is much lower than the cost basis of the bonds, resulting in a large loss.
None of this showed up on the 1099-B from the broker. The broker rep didn't seem to understand, but replied that they thought it was a like exchange, so not taxable until the new shares are sold. But the exchange seems significantly different from the original bonds, especially as the cash dispersed was greater in value than the shares distributed.
I feel like a mandatory exchange is similar to bond maturity or a full call, where the gain from the difference between the market discount and principal is ordinary interest income, so I thought the loss from a mandatory exchange should also be ordinary, but can't figure out how to report as such.
- Entering the loss into form 8949 part II long term results in the loss being offset against long term capital gains.
- Entering an adjustment for a negative market discount doesn't seem to make sense, since a market discount is typically a positive interest income on Schedule B.
- On the other hand, entering the loss as an Amortizable Bond Premium Adjustment on Schedule B would be a negative interest income, followed by entering the same value for both proceeds and cost basis on form 8949 for 0 capital gains. But this wasn't a premium, so I'm not sure this makes sense either.
- Or am I mistaken and this is simply a long term capital loss?
