In article <1354368[at]news.IPSWITCH.COM> , Dan Lanciani <ddl[at]danlan.*com> wrote:

- quote -

Short term capital gain (except for one day's worth of accretion).

Seth

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triply-redundant <3r[at]noEmail.invalid> wrote:

- quote -

Personally, I do not see why these particular P550 instructions are
there. More logical is to enter only a single line for the
transaction, with the accrued market discount included in the
cost/basis.

Any ideas on if this is okay, and if not what is the purpose
of the reporting per 550 with an extra line?

Steve

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- quote -

Has anybody figured out how to get TurboTax to report this correctly?

According to IRS publication 550 for 2008 (page 50, column 2, paragraph 3),
extra lines are needed on Schedule D and schedule B. One problem is that
the extra Schedule D line needs have the "profit/loss" column filled in but
the "proceeds" and "cost" columns both empty. TurboTax doesn't seem to
allow this, except by overriding, with who-knows-what side-effects. (It's
sort of like a "Wash Sale" line; TT software knows about wash sales, but
apparently not about accrued market discount for bonds.) This question was
posted on the TT forum web site, but there has been no response.

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Dan Lanciani <ddl[at]danlan.*com> wrote:

- quote -

Right.

- quote -

Your gain has to equal or exceed the entire accreted amount for you
to pay tax on the entire amount. Otherwise, you only pay tax
on the amount of the gain.

- quote -

"You must treat any gain when you dispose of the bond
as ordinary income, up to the amount of the accrued
market discount".

The rest of the gain, if any, is capital gain. If the gain is
less than the accrued market discount, you report only
the gain as interest income.

Steve

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removeps-groups[at]yahoo.com <removeps-groups[at]yahoo.com> wrote:

- quote -

Making said election constrains one to using such accounting
for all bonds in the future, unless the IRS gives you permission
to change your mind. This could be onerous.

- quote -

Sure, but in other circumstances you might prefer not to pay the
tax until the bonds are disposed of. Particularly since you
could end up paying tax on interest that you never see because
the bonds get wiped out at some future point. You might be
forced to pay this ongoing tax even on speculative bonds.

Steve

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Thanks to all who replied.

- quote -

This was the last uncertainty for me. Now I don't see anything in pub 550's
discussion of market discount that indicates acceleration if the bond is
called.

So I'll go with the investinginbonds.com summary of pub 550's provisions,
pro-rating the market discount over the holding period.

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In article <goig9h$1qo$1[at]blue.rahul.net> , spope33[at]speedymail.org (Steve Pope) writes:
| Dan Lanciani <ddl[at]danlan.*com> wrote:
|
| > spope33[at]speedymail.org (Steve Pope) writes:
|
| > | The above link, fifth question down, says otherwise. It says
| > | to take it all in year of sale/disposition.
|
| > It says:
|
| > ``For bonds acquired after April 1993, the amount of a bond's market discount
| > is accreted between the bond's date of acquisition and its date of maturity.
| > Accreted market discount must be included as ordinary, taxable income in the
| > year a bond is sold, redeemed or otherwise disposed of.''
|
| > It seems clear that they are saying that you do not take all the market
| > discount in the year of sale/disposition unless that disposition is at
| > maturity. Why talk about an accreted value if that value is always
| > the whole amount?
|
| I guess I disagree with your interpretation of this sentence.

They give several examples that make it clear that in some cases the
amount taxed as ordinary income is less than the entire market discount.
Again, I'm not saying that they are correct, but they at least explain
their position consistently.

| This sentence says you accrete the discount as you hold the bond,
| and then you report the entire accreted amount in the year of sale,
| redemption, or maturity.

I agree. The question is whether the "entire accreted amount" is
equal to the total market discount at time of purchase in cases
other than holding to maturity. I wonder if we are merely using
different wording. It would be helpful if you could respond to
either the example I responded to (buy 9000, call 10100) or the
more extreme example I suggested (buy 90, sell 100 the next day)
with actual numbers so I could understand how (if at all) you
disagree with the article.

| As for "why talk about an accreted value", I suspect it is to make
| clear you can't ultimately report this amount as a capital gain,
| which is what you might like to do.

It seems to be more than that:

``An investor may choose to accrete market discount on a daily basis using
the ratable, or straight-line method, or using the constant interest rate
method.''

Two possible methods to compute a value which is always the total seems
odd...

Might as well copy their whole example in case others don't want to go
to the web site:

``For example, suppose an investor buys a tax-exempt bond--originally
issued at par--in the secondary market at a price of 90 with ten years
left until maturity. Five years later, he or she sells the bond at a
price of 95. Assuming the discount is amortized on a straight-line
basis, the investor must treat the five-point gain as ordinary income
in the year the bond is sold. (Total market discount at the time the
bond is purchased is ten points, accreted on a straight-line basis over
the ten years until maturity. After five years, accreted market discount
totals five points.) Suppose under the same circumstances, the investor
sells the bond after five years at a price of 96. Five points (the total
accreted market discount) are taxed as ordinary income and one point is
taxed as a capital gain. Suppose, again under the same circumstances,
that the investor holds the bond to maturity. Ten points (the entire
amount of market discount) are taxed as ordinary income in the year the
bond is redeemed. Finally, suppose the investor sells the bond after
five years at a price of 88. In this case, the investor would recognize
no market discount income and would recognize a capital loss of two
points.''

| Tangentially, the IRS publications do not use the term
| "accrete" for this situation (that I recall).

Accrete, accrue, and amortize seem to have lost whatever subtle distinction
they once had...

Dan Lanciani
ddl[at]danlan.*com

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Dan Lanciani <ddl[at]danlan.*com> wrote:

- quote -

I guess I disagree with your interpretation of this sentence.
This sentence says you accrete the discount as you hold the bond,
and then you report the entire accreted amount in the year of sale,
redemption, or maturity.

As for "why talk about an accreted value", I suspect it is to make
clear you can't ultimately report this amount as a capital gain,
which is what you might like to do.

Tangentially, the IRS publications do not use the term
"accrete" for this situation (that I recall).

Steve

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On Feb 27, 6:38 pm, spop...[at]speedymail.org (Steve Pope) wrote:

- quote -

Thanks. What might the onerous side effects be? One would imagine
that reporting $10,000 interest every year for 10 years is better than
reporting $100,000 in one year, as the latter can push you into a
higher bracket. Of course, that only applies to taxable bonds (such
as corporate bonds or munis from another state).

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In article <goi03o$e30$2[at]blue.rahul.net> , spope33[at]speedymail.org (Steve Pope) writes:
| Dan Lanciani <ddl[at]danlan.*com> wrote:
|
| > self[at]emailNot.invalid (MyVeryOwnSelf) writes:
|
| > | But I also ran into a variation of the example. Suppose the bond was called
| > | for 10,100 before maturity, but after the bond was held for a year. Does
| > | this result in:
| > |
| > | - 1,100 market discount?
| > |
| > | - 1,000 market discount and 100 long-term capital gain?
| > |
| > | - something else?
|
| > Well, if you believe this:
| | > http://www.investinginbonds.com/lear...=8&subcatid=62
|
| > the answer might be "something else" as the market discount is applied
| > over the life of the bond.
|
| The above link, fifth question down, says otherwise. It says
| to take it all in year of sale/disposition.

It says:

``For bonds acquired after April 1993, the amount of a bond's market discount
is accreted between the bond's date of acquisition and its date of maturity.
Accreted market discount must be included as ordinary, taxable income in the
year a bond is sold, redeemed or otherwise disposed of.''

It seems clear that they are saying that you do not take all the market
discount in the year of sale/disposition unless that disposition is at
maturity. Why talk about an accreted value if that value is always
the whole amount?

If this is correct (and unless there is some other rule that accelerates
the accretion of market discount on call) you might not recognize the
full market discount on call; some of it could still be capital gain.
They give several examples that appear to make this quite clear. I'm
not claiming that they are correct, but if they are (and again if there
is not some gimmick that accelerates recognition of market discount on call
rather than sale) then the example above would result in something less
than $1000 in ordinary income and something more than $100 in capital
gain.

Consider something more dramatic:

Yesterday I bought a bond at 90, i.e., at a market discount of 10. Today
I sell it for 100, i.e., at par. Would I recognize all of the 10 point
market discount as ordinary income?

Dan Lanciani
ddl[at]danlan.*com

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Dan Lanciani <ddl[at]danlan.*com> wrote:

- quote -

The above link, fifth question down, says otherwise. It says
to take it all in year of sale/disposition.

Steve

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In article <Xns9BC288589B84BRCLQUSHB976[at]85.214.105.209> , self[at]emailNot.invalid (MyVeryOwnSelf) writes:

| But I also ran into a variation of the example. Suppose the bond was called
| for 10,100 before maturity, but after the bond was held for a year. Does
| this result in:
|
| - 1,100 market discount?
|
| - 1,000 market discount and 100 long-term capital gain?
|
| - something else?

Well, if you believe this:

http://www.investinginbonds.com/lear...=8&subcatid=62

the answer might be "something else" as the market discount is applied
over the life of the bond. I found this particular article more clear
than most. It gives examples that answer the kinds of questions I ask
rather than avoiding those cases as many publications do. (Note that it
covers the case where the bond is sold without recovering the discount.)
That probably means that it is wrong or at least over-simplified.
Also, while the title of the article includes "Municipal" it appears to
make the distinction between taxable and tax-exempt bonds as necessary.

Of course, with the perpetual tweaking of bond tax rules the article
might also be out of date. As with premium amortization on munis they
may have found new ways to accelerate recognition of market discount.
I keep waiting for someone to come up with the holy grail to make the
actual interest payments of municipals partially directly taxable. I'm
sure someone thought of the obvious argument that a muni purchased below
par has exempt interest only up to (coupon) * (purchase price) with
the rest being taxable, but then realized that this would just have a
weird effect on market prices.

Dan Lanciani
ddl[at]danlan.*com

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- quote -

Thanks for the info.

But I also ran into a variation of the example. Suppose the bond was called
for 10,100 before maturity, but after the bond was held for a year. Does
this result in:

- 1,100 market discount?

- 1,000 market discount and 100 long-term capital gain?

- something else?

I haven't noticed this case spelled out in Pub 550.

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removeps-groups[at]yahoo.com <removeps-groups[at]yahoo.com> wrote:

- quote -

Yes.

- quote -

I disagree that this is not correct. Although the taxpayer can
elect to report the market discount each year, absent such
an election (which might have onerous side-effects, so you generally
don't want to do so), the taxpayer reports the entire market discount
for all years the bond was held in the year of sale or maturity. So
in the OP's case, this is $1000, reported entirely in 2008.

I base this on the discussion on Page 15 of Pub 550.

I'm interested in hearing other opinions though.

Steve

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On Feb 24, 11:43 am, MyVeryOwnSelf <s...[at]emailNot.invalid> wrote:

- quote -

I normally add the amortization to the cost basis, so the cost basis
and proceeds are both 10k, no additional line.

- quote -

Not quite. The schedule B for 2007 would have about 4 months and 20
days (about 4.66 months) of the discount, while the schedule B for
2008 would have 9 months of the $1000 discount. So roughly about
4.66/13.66 or 34% of the $1000, or $341 would be in 2007, and the
remainder in 2008. But you probably have to use the constant yield
method to get the exact numbers.

- quote -

Sounds reasonable to me. You can have a spreadsheet with all the
details on one line, but just combine them into one for Schedule B to
save typing so much stuff, and if the IRS asks send them the
spreadsheet.

Just be sure that your broker does not already include amortization on
their Schedule B. They probably don't, but just in case...

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I'm checking my understanding of IRS publication 550 about how to report a
maturing bond that had been bought at less than face value.

Here's an example:
Face value: 10,000
Purchased for: 9,000
Purchase date: 8-10-07
Maturity date: 10-1-08
No OID for this bond
Market discount was not reported piecemeal in earlier years

Apparently, there should be

(a) an extra "Accrued market discount" line in Schedule D with
-1,000 in column (f), offsetting the 1,000 capital gain,
and

(b) an extra "Accrued market discount" line on Schedule B to
report the 1,000 as ordinary income.

Is this correct?

On Schedule B, can multiple bonds' amounts be combined in one line?

Apparently, the intent is to tax the market discount recovery as ordinary
income rather than long-term capital gain, though the reporting method is
the same for both short-term and long-term (using the corresponding section
of Schedule D).

Has this provision been in place for long?

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