Structured Notes

[ghawes2206]

How can a structured Note be along term capital gain?

[baldietax]

not sure what type of note but in general for individual bonds it can be difficult to engineer a cap gain as discount is generally treated as ordinary income especially if held to maturity.  The coupon is ordinary income so, setting that aside, I assume you're buying it at a discount and hoping for a price appreciation?

The problem you will find is that your discount starts accruing daily to the redemption price from the time you buy it and is recorded as Accrued Market Discount on 1099-B upon disposal which could be taxed ordinarily.  The smaller of the AMD and the difference between proceeds and cost basis, is recorded as ordinary income (adjusted on Form 8949 col (g) and moved to Schedule B).  Any excess above that is a capital gain.  If you hold the bond to maturity then by definition your gain is all AMD, and hence all ordinary income.  If you sell prior to maturity, the market price needs to move up higher than the basis of your bond adjusted for the AMD to get a cap gain, which depends on timing, market and properties of the bond (coupon, duration etc).

So say you buy a bond at 90 and sell it when the AMD has accrued $5 (about halfway - not sure exact calculation).  If you sell it at 94 then you have an AMD capped at $4 recorded as income, and no cap gain/loss.  If the market prices it at 96 then you have an AMD of $5 and cap gain of $1.

This is why low coupon discount munis have higher yields than higher coupon munis, because the price differential incorporated in the yield is not only taxable, but likely ordinary income rather than a cap gain.

Publication 550 goes into more details, see also instructions for the AMD handling on Form 8949 (excerpt pic below).

One way to generate cap gains from bonds is via ETFs where any price appreciation is reflected in the ETF price and is just a straight cap gain without the AMD complication; the downside of bond ETFs is the exposure to duration risk and forced selling in the fund deteriorating principal with no guarantee of recovery.

Not a CPA, just my 2 cents, hope this helps point in the right direction on this topic.