"David Woods, EA" <dwoods[at]woods-financial.com> writes:

- quote -

If the bond was selling at enough of a discount to par,
there *is* OID (well, I guess technically it's not OID since
the bond wasn't bought at original issue, but you have to
accrue phantom interest on the market discount using the
same methods you use to calculate OID). See IRS Pub 1212.
It goes into numbing detail on all of this.

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

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:
- quote -

From the description of the purchase the bond was bought at
market discount (as opposed to a zero coupon or a stripped
bond). I'm assuming that the interest she reported on
schedule B was from coupon payments. On bond bought with
market discount the gain recognized on the bond is treated
as ordinary interest income and reported on Schedule B to
the extent of the accrued market discount. The sale of the
bond must still be reported on schedule D and the bond's
basis is increased by the amount of ordinary interest income
recognized on Schedule B from the market discount realized.

If in your example the bond was $20,000 par value and was
held to maturity, all of the market discount would have
accrued and the entire $10,900 gain would be interest
income. If the bond has not matured or been called, some of
the market discount will not yet have accrued, and some of
the gain would be capital gain.

Brian Bivona

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"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote:
- quote -

If she bought the bond on the open market, I doubt it would
be OID and her basis would be the purchase price.

--
David M. Woods, EA
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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"David Woods, EA, ChFC, CLU" <dwoods[at]woods-financial.com> wrote:
[snip]
- quote -

Right, but not all of the difference is capital gain. Some
of it is ordinary income, which gets reported as interest
and subtracted from the capital gain. Congress got wise some
years ago to the investment tactic of buying
low-interest-rate bonds at a deep discount, holding them to
maturity or close to it, and booking the difference as a
capital gain.

The difference between the $9,100 she paid and the bonds'
face amount is "market discount", which gets amortized (you
can use either straight-line or constant-yield methods). The
amortized market discount is interest income and flows to
Schedule B.

The sale gets two Schedule D entries: one for the $10,900
gain and one for a loss in the amount of the amortized
market discount. At least that's how TurboTax advises
reporting it:
http://www.turbotax.com/articles/How...marketdiscount

--
Chris Green

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"BM30003700" <bm30003700[at]aol.com> wrote:

- quote -

Yes.

- quote -

$9,100.

--
David M. Woods, EA, ChFC, CLU
Woods Financial Services
Norwood, MA 02062
www.woods-financial.com

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bm30003700[at]aol.com (BM30003700) writes:

- quote -

Yes.

- quote -

Hmmm...

Depending on exactly when the bond was issued, she probably
should have been reporting OID (due to the discount) in
addition to the actual coupon interest the bond was throwing
off. Her basis would be increased by that OID.

With respect to both of your questions, see
IRS Publication 1212.

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

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My client sold treasury strips that were purchased many
years ago. On these treasury strips she reported OID income
every year on her return. Do I add this OID to the price
she paid for the strips to get her cost basis?

Also, she sold a bond that she purchased several years ago
at a deep discount. The purchase price was $9,100 several
years ago, whereas the sale price was $20,000. She also
reported interest income on that bond on her tax returns
over the years, but as regular interest, not OID interest.
This is where I get confused. Is her basis in the bond sold
for $20,000 just the $9,100?

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