- quote -

This didn't seem quite right to me, so I looked in IRS publication 550:

_Market discount_ Market discount on a
tax-exempt bond is not tax-exempt. If you
bought the bond after April 30, 1993, you can
choose to accrue the market discount over the
period you own the bond and include it in your
income currently, as taxable interest. See "Mar-
ket Discount Bonds" under "Discount on Debt
Instruments," later. If you do not make that
choice, or if you bought the bond before May 1,
1993, any gain from market discount is taxable
when you dispose of the bond.

If I understand this correctly, there's no capital gain only if (in effect)
you already spread the gain over the time you held the bond, and declared a
portion each year as taxable interest.

I do realize that in the opposite case -- a tax-free bond purchased at a
premium -- doesn't let us get a capital loss.

Disclaimer: I'm not a tax pro, so I might be missing a key point here.

"pixel_a_ted" <pixel_a_ted[at]yahoo.com> writes:

- quote -

Not quite. You have a capital gain or loss if you sell before
maturity and you incur a gain or loss compared to your *adjusted
basis*, not your purchase price. Adjusted basis is the purchase
price increased by any accrued discount and decreased by any
amortized premium.

- quote -

Correct.

- quote -

Not quite. Your basis in the bond is increased with the amount
of the discount that is accrued as current-year income each year.
That has to do with the yield when you *purchased* the bond, not
current rates. In any event, since by definition the full discount
has been accrued by maturity, basis at maturity equals face value
and so there's no gain or loss when the bond matured.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

I know that this can be a complicated topic, so maybe someone can just
provide a link to a clearly written explanation if a simple answer to
my question is not possible.

My basic question has to do with purchasing individual tax-free
municipal bonds at discount or premium. I read in some places that
capital gains considerations come into play only if you sell the bond
before it matures and you incur a gain or loss compared to your
purchase price. According to this, if you buy a bond at discount and
wait until it matures, there is no capital gain. (This makes sense as
the purchase price of the bond is adjusted so that the yield you get
for your tax-free income is in line with current interest rates.)

Recently, someone told me something different, so I am confused and
would like to know whether the possible future taxation should be
considered when deciding on purchasing a particular bond.

I know there are further complications with OID bonds, so maybe we can
leave them out of the current discussion.

Thanks.