Help--accrued market discount not on form 8949

[mtreehugger]

Instead, TurboTax Deluxe 2024 put it on Schedule B part 1 as interest.  These are in fact capital gains.  My very large brokerage firm says it must be reported on form 8949 part 1 with Box A checked.  I'm not even sure filing with it reported on Sch. B (with corresponding negative entries on 8949) is legal!!!  Regardless, because I have a huge capital loss carryover, I want to report it properly and as my broker informs so that I can use up some of my capital loss carryover.

How do IB do this?  FYI, I auto-imported form 1099 composite twice but this still won't go away.  I've tried using whatever method I could find to step through in TT to fix it, but I'm getting nowhere.

Sure hope someone can help!

THANKS!

[SusanY1]

Accrued market discount has two parts, and one of those is the interest income that you're seeing.

The amount of the discount is correctly reported as interest income.  It is not a capital gain.  You don't remove or adjust that on Schedule B.  TurboTax is handling that part correctly. 

However, the amount of the accrued market discount recognized as interest income is then used to adjust the capital gain when a bond is sold.  It increases the basis of the bond, lowering the capital gain that is generated from the sale (or increasing the loss.)    This is the part that goes on ‌Form 8949.   

There isn't a standard format for reporting that used by all firms,  so you need to check to see if it is already built into the reported cost basis of your asset.   Some brokers add the market discount back in for you and others don't. 

If yours doesn't, then you adjust the cost basis of your bond in the Investments section of TurboTax.   Usually if you examine the printed or PDF version of your 1099 you will be able to determine if your cost basis includes this interest income added in or not. 

If you're not sure, you can ask the broker.  

 

[baldietax]

Agree with @SusanY1 that TT is doing it correctly.

Generally, when you sell a bond that was purchased at a discount there will be 'Accrued Market Discount' (AMD) reported in Box 1f.  You will also have a gain on the sale based on the market price at time of sale (proceeds - cost).  The lesser of these two is considered to be ordinary income and will be adjusted on Form 8949 to reduce the gain and this amount will be reported on Schedule B.  If you had a gain in excess of the AMD that had accrued at the time of sale, then that will remain and reported as a capital gain on 8949 / Sched D.

If you hold that bond to maturity then the gain will equal the AMD, and it will all be reported as ordinary income on Schedule B and zero capital gain.

see IRS Publication 550 'market discount bonds':

https://www.irs.gov/publications/p550#en_US_2024_publink100010016

"You must treat any gain when you dispose of the bond as ordinary interest income, up to the amount of the accrued market discount"

and instructions for Form 8949 adjustment in col g:

Form 8949 col g

[mtreehugger]

Thanks SusanY!  But could you be confusing accrued market discount with accrued market interest?  AMI would decrease my basis whereas AMD is part of the "profit." (Otherwise you lost me, I'm afraid.)

Also, this is regarding holding Treasury note until maturity.  Is it true that if it's held to maturity then it's not capital gains, whereas if I had sold it earlier it would be capital gains?

Thanks!!!

[mtreehugger]

Thank you baldietax!  Unfortunately, I'm still confused, although I think you may have reaffirmed what I've been stumbling with regarding holding to maturity (never do that again!!!)  To my eyes your answer seems to blur AMD with AMI (see my response to SusanY) or I'm just not intelligent anymore. 

Speaking of that, do you know where/how to report AMI--because I need to include this in my basis but my broker goes with basis at the original sale on T-notes, which doesn't account for the interest I paid out when I bought it.

And any help in how to approach any of this with the software would be greatly appreciated!!!

Thanks!!!

[baldietax · Accepted solution]

For the accrued interest you paid at purchase, you would offset that against your 1099-INT with the coupon interest, as an adjustment.  You should have coupon interest on 1099-INT Box 3 and enter the adjustment (as a positive number to reduce income) on the interview screens following the box input.  It will show up on Schedule B as a negative "Accrued Interest" adjustment.

I don't think you need to do anything with cost basis, that is usually recorded without the accrued paid, and brokers usually take care of cases where cost basis adjustment needs to be recorded due to premium amortization, 1099-OID reporting etc.

Back to the AMD, as quick example - if you buy 10k par of bond @ 98 with 2 years left to maturity, it will accrue the $200 discount as AMD from the time you buy it until maturity (calculated by the broker).  If you hold it to maturity, then you have a 'gain' (calculated as proceeds - cost) of $200, but underlying AMD is also $200.  The 'gain' is adjusted to zero for Schedule D, and the $200 is reported on Schedule B as income.

If instead you sold it before maturity, the outcome depends where the market is relative to where you bought it and your AMD at the time of sale.  Suppose you sold it when the accrued AMD to that date is $100 i.e. accreted cost price is 99, so half way.  But you sold it in the market at 99.5 for whatever reason so you made $150; in this case you have $100 of AMD and $50 of gain.  If the market happened to be at 98.5 you only make $50 but this is less than the $100 AMD, so the $50 is reported as income with no gain.

It's not the case that selling prior to maturity gives you cap gain and only holding to maturity gives you income, there is no such distinction in the tax code (see Pub 550 market discount bonds section linked above).  It just so happens that at maturity you are guaranteed that the gain is same as AMD so it's all income.  To generate a cap gain off a discount bond (any bond, including munis) you would need a large move down in rates / move up in market prices, early enough in your holding period such that your AMD hasn't accrued much relative to the change in market price you are able to realize.

Hope this helps.