Accrued Market Discount/Cap. Gain on Treasury Bond - Won't Match Brokerage Statements

[vryconfused]

I've seen the other post regarding Box 1F (Accrued Market Discount) being shuttled to Sch. B as interest and the 'Learn More' explanation in Turbotax (TT) stating "USUALLY, if accrued market discount is reported on your 1099-B ... we'll include this amount as interest to Sch. B". This does not match the information on my 1099-INT or the 1099-B (capital gain) received from the brokerage firm for the one treasury bond I had. The 1099-B shows $1000 capital gain and Box 1F = $1000. TT imported the items with the $500 as interest (correct from 1099-INT) and also the $1000 as interest (on Sch. B) with a capital gain = $0. Deleting the import and manually entering the data - including box 1F - yields the same result. The only way to make TT match my printed brokerage statements is to make box 1F (Accrued Market Discount) = $0. Then, TT shows $500 interest and $1000 capital gain - but the data in TT no longer matches the 1099-B for box 1F.  There was no effect on the state return.

What is wrong and is it an issue if the entered info (Box 1F) does not agree with the info provided to the IRS from the brokerage firm even though that seems to be what's required to get the TT information to match the paper statements?

[baldietax]

what was reported on the 1099-INT and 1099-B sounds correct.  1099s are the official tax reporting and what you should follow.

I think the brokerage is wrong to say this AMD is a capital gain.  Selling a note can generate AMD and a capital gain/loss, but holding to maturity should be all AMD.  By "match the paper statements" do you mean trying to match how the brokerage is reporting it in monthly statements where they sometimes show YTD interest and gain/loss etc, which doesn't match their 1099 reporting.  Some brokerages struggle with this stuff (and not kept up with elevated retail holdings in Treasuries since 2022), and these statements are not official tax reporting; e.g. Merrill can't even show T-Bill interest in their YTD interest on statements or online, even though 1099 is correct (those just hit 1099-INT Box 3, different to how T-Notes behave).

One other point on the 1099-INT when you bought the bond if you paid accrued coupon interest, be sure to adjust for this to reduce your income/tax.  It should be applied in the year of the first coupon payment after purchase so if you bought the bond in 2023 but it didn't pay coupon til 2024 you would apply it in 2024 taxes.  There is a question after you input the 1099-INT in EasyStep whether you need to adjust this entry and you should get a question for accrued interest.  Finally, if you 1099-INT has a mixture of boxes (1,3,8) for different types of bonds and you have accrued coupon interest adjustment then TT won't know whether it's an adjustment for which box and will spread it over everything.  In this case you need to split up the 1099 and input each of these separately (along with any corresponding premium from Boxes 11-13) to apply any accrued against the correct one(s).

Once the 1099s are in... you may have also noticed in these threads there is an issue with state reporting, if that matters for your state, you should see the $500 from 1099-INT is not taxed on your state taxes, but the $1000 AMD is.  There is some debate on state exemption for AMD and it depends on the language in your state tax code.  Assuming it's exempt in your state (can't advise on that), you should be able to enter a "miscellaneous" subtraction in the TT state program with an explanation statement, tho some people have commented this precludes e-file.

Personally I've stopped buying low coupon notes due to these issues, so if you are actively buying Treasuries I would try to stick to T-Bills for short maturities (< 1 year) and higher coupon notes (>4% depending on market) for longer maturities, ideally with a little premium (priced a little above 100) so you don't have any AMD on the 1099-B, or very close to par to minimize the state tax issue.

Caveat - Not a CPA/Expert but above is my understanding based on experience dealing with these issues.

[vryconfused]

Thanks for the response! I bought the treasury bond through a brokerage at a discount (from what I recall from 2 years ago, ~.98Xish? - which I thought was the discount/capital gain - I'm not in finance at all) and held it to maturity which was 54 weeks ending in Jan. 2024. The only info I have on it is the 1099-B and the 1099-INT.

By matching the paper statements, I mean getting TT to show the AMD as a capital gain like the 1099-B. The only way I can get TT to show this one transaction as a capital gain is make Box 1F = 0. If any positive value goes in there, it's automatically moved to Schedule B because the 'Form 1099-B Worksheet' in TT states: "Long term sales with cost basis reported to the IRS" Box D, with the Gain/Loss = +1000, the AMD (Box 1F) = 1000, so the Adjusted Gain/Loss = Gain - AMD = 0. Can't get around that unless 1F = 0.

I tested a friend's software which put this transaction in as a capital gain, but also asked for the 'Market Discount Adjustment' and stated "The market discount adjustment is considered interest income. You'll also need to enter it in interest income". The value had to be entered as a negative number on that screen, then looked like I was instructed to manually add it to Sch. B as a positive number so both zero out as interest, but I "assumed" that was already considered in the 1099-INT.   I guess I don't know the difference between the 'Accrued Market Discount' (Box 1F) and the 'Market Discount Adjustment'. I assumed all this was done by the brokerage firm and contained in the 1099's they sent. I also assumed brokerage firms provided enough info so all tax software could complete the taxes the same without manual intervention. Maybe not.

Based on your note, I'll ask the brokerage firm more questions as you outlined in the 2nd paragraph & see where it goes. If nowhere, I only had one of these treasuries (it's now the last) and if I leave TT to do its thing, I'll end up paying a higher tax on it (interest vs. cap. gain rate) and the taxes filed won't match the 1099-B provided to the IRS. But in the grand scale, it's a small amount to overpay and me just wanting accuracy & no future issues. 

Thanks, again!

[baldietax · Accepted solution]

ok I see where the confusion may be - the 1099-B is showing a cap gain but that's the gain before the adjustment and not the 'net' gain that gets reported; entering the AMD adjustment will bring that gain down to zero on your Form 8949/Schedule D and it won't match the 1099-B gain figure and the difference will be on Schedule B.  See notes from Form 8949 below.

Different tax software seem to treat this differently, in TT case it automates transferring the AMD over to the Schedule B, sounds like this other software makes you do the Schedule B manually (but may handle state filing better).  The end result in both software should be a gain/loss of zero and the AMD is taxed as ordinary income not a cap gain.  I don't think you will be overpaying tax on this (unfortunately).

For more info on this topic, see Publication 550 from IRS comments on "market discount bond", p77 etc

https://www.irs.gov/pub/irs-pdf/p550.pdf

Report the sale or trade of a market discount bond in
Form 8949, Part I or Part II, whichever is appropriate. Use
the table How To Complete Form 8949, Columns (f) and
(g) in the Instructions for Form 8949 to help you figure the
amounts to report for a sale or trade of a market discount
bond. Also report the amount of accrued market discount
in column (g) as interest income on Schedule B (Form
1040), line 1, and identify it as “Accrued Market Discount.”

and in Form 8949 this table which TT takes care of based on your 1099-B:

https://www.irs.gov/instructions/i8949#en_US_2022_publink1000114436

[vryconfused]

Thanks! This finally explains it!