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?
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 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 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 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? 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 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 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 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 details from my 1099B verbatim into my 8949 form.
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.
@msdalt01 you wrote:
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."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?"
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
Correct ... since the broker did not list the basis it is your responsibility to do so.
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 .
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?
These are non covered bonds.
This is a Tax-Exempt OID Bond from California acquired 2014 and maturity date 2017. Every year I get a tax exempt obligation of around 350 (it increases each year) and a market discount accretion of around 30. I want to know whether this $350 must be paid every year? Or do I have the option of waiting until the end? It does not effect my federal taxes (1040) but does effect my state taxes (140) since this bond is non-resident.
I presume I should report the market discount accretion in the OID Box. 4. So do I report the OID discount in the Box 11? The brokerage company does not tell me what box and it is not reported on form 1099. I believe it has something to do with it being a non covered bond. However the reckoning will come what it matures (since the IRS appears to know everything).
It is a minor matter in the scheme of things but I would like to get it right.
Thanks for your patience.
I have a similar situation.
Has anyone nailed the correct precise answer on this?
My understanding is Bonds started to be covered in 2014.
I have a Muni Bond that is tax exempt.
Purchased in 3/6/2014. Says "SER 2012" I imagine that means it was issued in 2/14/2012. I paid the full price of the bond + accrued interest of $111.11 and a minimal processing fee.
"DUE 2036"
It was Called 12/1/2021.
On IRS.gov website regarding the information on bonds, it sounds as though there is a choice between paying tax on the "interest" yearly or at the time the bond is cashed out.
If the yearly option is chosen, the IRS has to approve using method of paying tax at the end of the life of holding the bond. WHEW!
I can not tell which method was used. (I have another bond whose taxable interest is listed every year)
Looking back through tax returns H&R Block from 2014 forward, the interest has been entered in the Tax Exempt box, less ? it looks like ? Bond Premium which was listed on line 11.
On years when Bond premium was listed on line 13, the amount wasn't deducted.(sometimes)
I haven't received the tax form yet for 2021.
Since there seems to be a choice of when to report ?? and pay tax on the interest on Bonds, and if the amount reported on the form is the entire amount of interest over the time I have held the bond (as I think it has been covered the entire time) and then... how capital gains or losses play into it...
I am attempting to understand it before the form gets here!
The bond that was called was Tax Exempt, however, I do have one that is Not tax exempt and want to understand the implications and details of tax reporting while holding bonds.
I have read the IRS info, but find it unclear. When they are talking about yearly or at maturity - does that apply to both tax exempt and corporate bonds?
I would like to avoid paying double tax! & am attempting to understand all the brackets that affect taxation so as not to be bumped unnecessarily into a higher bracket after retirement.
I have a Muni Bond that is tax exempt.
if you bought the muni bond at a premium amortization of the premium is required over the life of the bond so that at maturity your adjusted cost basis and redemption price are equal. muni bond premium amorization is on line 13.of the 1099-int. since the bond was called before maturity there may still be unamortized bond premium.
the broker apparently did the amort for you and reported it on the annual 1099 consolidate report (that's how the amount got on line 13. it would only be subtracted from line 8 and the net reported in box 2a on the 1040. the 1099-B will might report the correct sales price and adjusted cost (cost less amortization of premium). it's just that the cost will not be reported to the IRS.
line 11 is for taxable bond premium amortization
for long-term taxable bonds (other than US Savings Bonds) I believe OID reporting was required since the 1980's
to read up more on his subject see IRS 1212
https://www.irs.gov/pub/irs-pdf/p1212.pdf
the option to report interest yearly or at maturity applies to US Savings bonds.
Reporting the interest all at once at the end
When electronic EE Bonds in a TreasuryDirect account stop earning interest, they are automatically cashed and the interest earned is reported to the IRS.
You can see the interest on your IRS Form 1099-INT.
If a financial institution pays the bond, you will receive a paper 1099-INT from that financial institution either soon after you cash your bonds or within the first two months after the end of the year in which you cash your bonds.
If you cash electronic bonds in your TreasuryDirect account, your 1099-INT will be available early the next year in your account. (Video)
Reporting the interest every year
You may, however, choose to report the interest every year.
You may, for example, find it advantageous to report interest every year
Note: You do not actually receive the interest every year even if you report it that way. The interest that the bond earns is reported on a 1099-INT after the bond is cashed or is reissued to reflect a taxable change in ownership. The 1099-INT will show all the interest the bond has earned over the years. Go to IRS Publication 550, Investment Income and Expenses, for instructions on how to tell the IRS that you already reported some or all of that interest in earlier years.
Once you start to report the interest every year you must continue to do so every year after that. for all your savings bonds and any you acquire in the future.
When you receive your 1099-B it will show the redemption of the bond with the amount that you were paid when the bond was called as the sales price.
The only thing that you will have to pay tax on is the profit earned on that bond redemption so in the next box should be the basis, or the amount you paid for the bond. In this case, the amount that you paid for the bond is the amount that you originally forked over plus all of the "non-taxable interest" that the bond earned while you held it.
If the sales price is larger than the basis then you have a capital gain. You'll pay tax on that.
If the sales price is smaller than the cost basis you have a capital loss. You get to deduct at least some of that on your tax return.