Questions about tax treatment of selling a brokered CD before maturity

[TurboLover2]

I have an original issue brokered CD that matures in 2024 and I am considering selling it before maturity. Looks like if I sell it now it will sell for a small discount.

1. How is that discount handled for tax purposes?
2. When I sell, the buyer pays me any interest accrued since the last interest payment? Will that be reported on the 1099 I get from the broker as interest received from that CD?
3. How would selling the CD at a premium be handled for tax purposes?

Thank you.

[Mike9241]

best to ask the broker  but 

Re: brokered cd tax

Post by Artsdoctor » Fri Mar 11, 2022 7:21 pm

If you were to sell a brokered CD before maturity, you have a capital gain or loss. You should also note going into the transaction that selling brokered CDs may carry a significant cost to you, and I would not consider them "liquid." Meaning, the price you get for the sale of the CD may not be favorable. In general, you should commit to holding brokered CDs until maturity.

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Re: brokered cd tax

Post by moneyflowin » Fri Mar 11, 2022 11:42 pm

If you buy a secondary issue or sell a new issue before maturity, you may have a capital gains or loss. You'll also have accrued interest that's added to or subtracted from your 1099INT (you create an adjustment on Schedule B). 

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source for the last two

https://www.bogleheads.org/forum/viewtopic.php?t=372522#:~:text=If%20you%20were%20to%20sell%20a%20br... 

most likely all the info you'll need for tax reporting will be on the 1099-B the broker sends you but you may have to dig into all the details since most brokers now issue consolidated 1099s so the data will be in different places.

[TurboLover2]

Thank you.  Yes, I am familiar with those issues on brokered CDs.  I have the ability to calculate whether or not it would be profitable to sell on the secondary market and I know that the fees and spreads are typically steep.  There are 2 CDs I am considering selling and the fees alone would be $500.

These are not long term CDs so it isn't a critical issue just to let them mature.  In some cases people might need the cash so that is why they sell.  But in my case there are other reasons I may want to sell.

The part I was least sure of is whether the difference between the purchase price (which in the case of an original issue like my CDs is the maturity value) and the price you sell the CD for is a capital gain or loss or whether it is counted as interest (or a subtraction from interest).  Some of these secondary market fixed income securities seem to have funky rules about that (treating what seems to be a capital gain/loss as interest instead) and I am not very familiar with the brokered CD secondary market tax rules.

But you are saying that if I sell at a discount from the purchase price that would be treated as a capital loss.  That seems to be the most expected answer so I will assume for now it is correct.  I will also check with the broker and see if they can confirm that and also if they actually show the capital loss on the 1099.

Thanks again.

[SusanY1]

Your sale of the CD will show as a capital gain or loss on your brokerage 1099. Any interest paid to you will show on the same 1099 as interest income as well.  

Once you receive your final 1099 from the broker (which can be as late as March in some cases), you will simply enter those numbers as they appear into TurboTax.  

[TurboLover2]

Thank you.  Sounds simple enough.

Only time I usually receive a 1099 as late as March is when they are corrected versions.  I hate when that happens!

Thank you to all for the help!