How do I handle "gain" on original issue CA municipal bonds that I purchased at discount and held to maturity/call at par? Do I adjust the cost up to par value in Ttax?

[mmargowsky]

Previously, I understood that the original purchase discount on muni bonds was treated as nontaxable interest, which required adjusting the cost up to par value when the muni bond matured or was called at par, for tax reporting purposes. Is this still the case or has it changed?

[CynthiaR · Accepted solution]

Calculate your adjusted cost basis. This is the original cost of the municipal bond, plus any adjustments, such as capital returns or interest. For example, if you purchased a 10-year municipal bond at $1,000 with a discount of $800 and a 5-percent coupon, your adjusted cost basis will be $800 based on $800, plus any interest accrued. Use the discounted price and interest rate to calculate the interest for the first year, which amounts to $40. In this example, the adjusted cost basis for the first year is $840.

Calculate any capital gains and losses using the Internal Revenue Service Form 1099-INT provided to you by your financial institution when you earn interest on investments. Gains and losses are the difference between the sale price of bonds and your adjusted cost basis.