topic Re: Called Bond in Get your taxes done using TurboTax

Zero coupon municipal bonds maturation

msdalt — Sat, 01 Jun 2019 15:04:30 GMT

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.

Wow, Scruffy! Thank you for your immediate, comprehensiv...

msdalt — Sat, 01 Jun 2019 15:04:31 GMT

Wow, Scruffy! Thank you for your immediate, comprehensive response! Let me expound on the details.
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?

see second answer below - don't forget to vote

ScruffyCurmudgeon — Sat, 01 Jun 2019 15:04:32 GMT

see second answer below - don't forget to vote

I'm dealing with the same issue myself. CPA's I visited s...

MrBiggieSmalls — Sat, 01 Jun 2019 15:04:33 GMT

I'm dealing with the same issue myself. CPA's I visited seem to have a difference in opinion on how to handle this. First said not to report anything, after all its tax free. Second said report it as shown on 1099b but add an adjustment to negate the "gain". I'm not conformatable with either. I also didnt report OID as I never received a 1099OID. I just need to know how to include this on my 8949.

After reading the information Scruffy provided, along wit...

msdalt — Sat, 01 Jun 2019 15:04:35 GMT

After reading the information Scruffy provided, along with text from other websites, I met with a tax advisor who confirmed the following line of reasoning.
By way of background, I am a packrat who retained the original purchase confirmation slips from 1994 along with all of my broker's consolidated 1099s.  There are Original Issue Discount (OID) sections on the 1099s, which identify OID on an annual basis dating back to 2007.  In 2006 and prior years, the statements merely say "No Reportable OID" or something to that effect. (These were tax free municipal zero coupon bonds and, living in Texas, there was no state income tax).
I am relatively proficient in Microsoft Excel and used an exponential regression equation to model the OID stream of payments, achieving good correlation (to within a few cents per year).  That enabled me to extrapolate OID back to 1994, when I purchased the bonds in the aftermarket.
I am a chemist, rather than an accountant. My simplified understanding is that OID is essentially an annual imputed interest which is reinvested back into the bond, much the same as reinvesting distributions from mutual funds.  Both increase the basis in the holding and reduce capital gains when the investment is sold, or in the case of my bonds, matures.
After adding the imputed interest (OID) to the basis from the original confirmation slips, I ended up with a slight capital loss.  I merely entered the increased basis (original purchase price + sum of annual OID) into TurboTax and everything seems to have worked out properly.
I invite correction of my interpretation, if warranted.
Michael

makes sense. my muni bond did not mature, instead i was c...

MrBiggieSmalls — Sat, 01 Jun 2019 15:04:38 GMT

makes sense. my muni bond did not mature, instead i was called a few years early. My 1099b has a loss of a few hundred dollars which I assume is due it being called early. Entering what is on my 1099b sounds like the correct way of reporting it with the basis on it being my actual basis plus OID throughout the years. But, just as I think I should not be reporting a taxable gain, I also dont want to be reporting a loss on it either. Maybe I'm being too paranoid and just need to enter what is on my 1099b verbatim into my 8949. Im also in TX by the way.

It is only the interest from a municipal bond that is fed...

Zbucklyo — Sat, 01 Jun 2019 15:04:40 GMT

It is only the interest from a municipal bond that is federally tax-exempt. Capital Gains and losses on municipal bonds are reportable and taxable.

So what is considered interest on a zero coupon muni bond...

MrBiggieSmalls — Sat, 01 Jun 2019 15:04:41 GMT

So what is considered interest on a zero coupon muni bond? Technically, I'm not gaining interest as I bought the bond on pennies on the dollar. Are you suggesting the OID is in fact taxable and since I didnt report OID while holding the bond I am now liable for taxes on the total OID? If so, what is the benefit of a zero coupon tax free muni bond?

No, the implicit interest embedded in the OID is not taxa...

Zbucklyo — Sat, 01 Jun 2019 15:04:43 GMT

No, the implicit interest embedded in the OID is not taxable. However, for a bond not purchased at issue or held to redemption, there is likely to be a small capital gain or loss.

@msdalt01 You went through the mathematical calculations...

ScruffyCurmudgeon — Sat, 01 Jun 2019 15:04:43 GMT

@msdalt01 You went through the mathematical calculations that are from which the annually revised (increased) cost basis is published nowadays on the broker statements (now required). Yes, indeed, at the end of the calculations you are likely to show a slight reportable taxable gain or a slight reportable capital loss depending on how close to the annual date from issuance you do the calculations. Think of it another way, the same mathematics go in to the matter of bid price on a bond in the days or months before semi-annual interest due date (this used to be a big deal when coupons could be stripped). The same mathematics play into the bid price on a share of stock in the days before X-date (date when a dividend is attributable to registered owner).

@mrbiggiesmalls To reiterate what was said in both an ans...

ScruffyCurmudgeon — Sat, 01 Jun 2019 15:04:45 GMT

@mrbiggiesmalls To reiterate what was said in both an answer below previously and what @Zbucklyo reconfirmed:
the imputed (and ultimately paid out in the form of the increased sale or maturity price) interest on a tax-exempt bond is indeed tax-exempt. However, the difference between the contantly-revised cost basis (as thoroughly discussed in both answers and @msdalt01 's calculations) and the actual proceeds of selling the bond (or a call price if called) will result in possibly taxable gain or reportable loss. It is not only permissable to report the capital loss, you do yourself no favour by failing to do so.

Thanks for all the confirmations ... I will enter the det...

MrBiggieSmalls — Sat, 01 Jun 2019 15:04:46 GMT

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

Presumably, if done properly, your financial services sta...

ScruffyCurmudgeon — Sat, 01 Jun 2019 15:04:47 GMT

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.

Details added to original query.

msdalt — Sat, 01 Jun 2019 15:04:49 GMT

Details added to original query.

see next answer and don't forget to vote

ScruffyCurmudgeon — Sat, 01 Jun 2019 15:04:51 GMT

see next answer and don't forget to vote

@msdalt01 you wrote: Yes, possibly with the help of the b...

ScruffyCurmudgeon — Sat, 01 Jun 2019 15:04:55 GMT

@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.

Re: Presumably, if done properly, your financial services sta...

rmittal01 — Sun, 06 Oct 2019 17:22:37 GMT

Dear Scruffy

I have a similar question

I bought a 20 year, $20,000 US treasury STRIP Zero coupon bond for $6199 in 1998 which matured in 2018.

My 2018 1099-B shows proceeds of $20K but no other information about cost basis etc.

I have paid the taxes on the OID reported interest on this each year.

Given that, can I just make the cost basis equal to the proceeds (i.e. $20K) when I fill out form 8949 in my tax return since I should not really owe any additional taxes?

Thanks much

Re: Presumably, if done properly, your financial services sta...

Critter — Sun, 06 Oct 2019 17:38:06 GMT

Correct ... since the broker did not list the basis it is your responsibility to do so.

Re: see next answer and don't forget to vote

jhrob — Sat, 20 Mar 2021 18:57:04 GMT

I get the accrued interest is reportable yearly on a federally tax free, state not tax free coupon bond. I will do this for this tax year.

What I cannot figure out is whether and where the OID of $300 (which increases a bit each year) which is reported yearly (informally since this is a non covered bond) and is presumably state taxed yearly or whether I can wait until maturity to see its penalty tax wise. There are no boxes on this non covered bond. I would really prefer to wait until maturity for the tax penalty. The important point here is that this is a non-covered bond so there are no boxes. I have have not paid anything previously .

Re: see next answer and don't forget to vote

ScruffyCurmudgeon — Sat, 20 Mar 2021 20:03:38 GMT

Please clarify - is this a taxable or tax-exempt fixed income security?

Is the Form 1099-OID reporting in Box 1 OID or is it reporting in other boxes either an acquisition or market premium or a market discount for taxable security, v. OID for tax-exempt?