On Apr 15, 9:08*pm, se...[at]panix.com (Seth) wrote:

- quote -

Right. It is very risky.

But the same can, of course, be said for a similar bond that you buy
for $100, that will be worth the same $100 at maturity, but which pays
70% annual interest. Economically it is the same thing. And any bond
paying 70% interest must have a high likelihood of default before the
3 years are up.

The key differentiation between interest-like investments and capital-
gain-like investments is whether the return is fixed in advance. If
it is fixed, even if risky, then it really is more bond-like than
stock-like. And also whether the issuer has an obligation to pay
regardless of how well or poorly the company does (short of
bankruptcy...)

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In article <4a301dae-a043-4659-84a8-8683afef9169[at]k19g2000prh.googlegroups.com> ,
Tom Russ <tar[at]isi.edu> wrote:

- quote -

No, it isn't. If you buy one coupon, the amount of the coupon payment
in excess of the price you paid is interest, the rest is return of
principal.

- quote -

Yes.

The result is that the total amount of interest doesn't change much.

Seth

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In article <Xns9BDF674343268spamtraplexregiacom[at]130.133.1.4> ,
Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:
- quote -

If a bond is selling for $20 now, and will be worth $100 at maturity
in three years if the company survives, then the market is saying that
there's an excellent chance that the company will not survive, hence
that bond is very risky.

Seth

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W <persistentone[at]spamarrest.com> wrote:

- quote -

["gain" in the above should have been "capital gain"]

- quote -

Here is my understanding: suppose one buys a non-deep-discount
bond at a market discount in the secondary market, and then
sells it for 100 sometime before maturity. Upon sale, the
accrued market discount is reported as if it were interest
income, and is added to the basis. Since the new basis is
still less than 100, the difference is capital gain.
The gain results from the accrued market discount being
less than the total market discount.

- quote -

Only if you buy the bond at a premium, AND elect to amortize it,
can this be an ordinary loss. Otherwise it is a capital loss.
And only the premium amount can be an ordinary loss; if you
sell the bond below 100, that part of the difference is always
a capital loss.

Steve

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Steve Pope" <spope33[at]speedymail.org> wrote in message
news:gqtoso$9fs$1[at]blue.rahul.net...
- quote -

Just to clarify this: if one sells a bond before maturity, these are
ordinary gains or ordinary losses?

The irony of these tax code changes is that the government may be giving
large ordinary income tax write-offs to bondholders who sell before maturity
at a loss. So instead of cutting off a tax savings on a capital gain
transaction, they are creating ways to write off lots of ordinary income.
That probably ends up helping rich people a lot more than the retired people
who so often depend on income from bonds.

--
W


- quote -

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

On Mar 31, 10:09*am, "Stuart A. Bronstein" <spamt...[at]lexregia.comwrote:
- quote -

If I correctly recall the motivation for this tax law change, it was
the introduction of special derivatives, namely the appearance of zero-
coupon bonds and also stripped treasuries. I don't recall whether
this happened before or after the 1986 tax reform or not.

But the basic idea behind the zero-coupon bond was that instead of
paying interest normally, the bond would be issued at a discount
instead. Under the prevailing rules, which roughly followed W's line
or reasoning is that the change in value from the issue discount to
the final redemption would become capital gains. So, here we had what
was a "bond" that didn't pay any interest, but instead had a pre-set
capital appreciation. This was guaranteed (OK, as much as any bond
principal repayment is guaranteed), and thus had none of the normal
risk attributes of capital gains.

So what happened is that one magically had managed to turn ordinary
interest income into capital gains. And with a favorable tax rate for
capital gains, this looked like a great tax avoidance strategy. So
given this set of facts and motivations, Congress stepped in and using
a function over form argument decreed that the increase in value of
the bond was, in effect, interest, since it was a fixed, predictable
and guaranteed return. Just like any normal bond paying interest.

So, at a macro-level this all makes sense.

The one part I don't quite understand is what happens in a stripped
bond transaction. I know that this involves taking a normal bond and
splitting it into a zero-coupon part and an income stream part. But
that makes it look like you are managing to increase the amount of
ordinary income, since the zero-coupon part appreciation ends up being
OID "interest" and the income stream is presumably also considered
ordinary interest. And what is the tax treatment of the payment made
by the person buying the income stream? Do they at least get to
consider part of the income stream a return of capital (i.e., non-
taxed?)

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Stuart A. Bronstein wrote:
- quote -

There's no guarantee at purchase the bond will be paid at maturity. He
could just as easily lose the $20 (in fact, at the time of purchase,
that could well be the more probably outcome elst the price wouldn't
have been discounted so deeply).

--

--
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Stuart A. Bronstein <spamtrap[at]lexregia.com> wrote:

- quote -

There is absolutely no question bonds are a capital asset
(it says so in Pub 550). It is just that, through a series
of tax code changes over the years, they have jiggered it
so that almost any form of gain on any bond is ordinary
income. If you hold the bond to maturity, it is all ordinary
income. If you sell before maturity, you can see gain
or loss. (And of course, if it defaults.)

I am still trying to interpret the rules in Pub 1212
regarding OID on zero-coupon bonds bought in the secondary
market. I think these rules actually say to ignore
the "original" OID and just treat any purchase discount
as OID instead. This also has the effect of eliminating
capital gain or loss if you hold to maturity. I'm not quite
certain of this yet however.

Steve

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<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"W" <persistentone[at]spamarrest.com> wrote:

- quote -

Since you knew in advance you could get $100 at maturity on a bond you
paid $20 for, it's not unreasonable for the IRS to call the difference
ordinary income. A capital asset is something that may go up or down
in value, and you take that risk.

Stu

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"Seth" <sethb[at]panix.com> wrote in message
news:gq8hk5$97l$1[at]reader1.panix.com...
- quote -

So the law in this case is making up both theory and practice that are just
false. If I buy a bond for $20 and am lucky enough to be paid $100 par
value in three years, then there is no basis for calling this $80 profit
"interest". There is no contract between the lendor and the borrower to
pay any interest at all on the $20. The contract is only for payment of
interest against the par value, and for a return of capital at par value at
the end of the bond holding period, or at some call interval. So at
intervals after I buy the $20 bond, I receive interest and should pay tax on
interest. At the end of the bond holding period, I am (if I am lucky)
paid $100 par value and the final interest payment. I understand the
final interest payment is interest. I do not understand by what theory
the $80 increase in bond value is called interest. That's just a bizarre
reading of facts. Maybe it is the law. But the law is just based on bad
assumptions in that case.


- quote -

Of course that's clear. But that's not the case I was ever discussing.
The interest on a bond is always interest. The question is what happens
when I buy the bond years after issue at either premium or discount from
par. To construe changes of par value as "interest" of any kind is a
complete distortion of reality. It may be the law. But it is a bad law,
based on a bad theory. How would it be any different than buying a house
in 1990 and selling it for a gain in 1996 and calling the difference
"interest"?


- quote -

If I pay $80 for a Ford Bond and sell it three years later for $20, is this
any kind of capital loss? If not, how does tax law classify it? It's an
ordinary income loss?

--
W

--
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In article <7Judncg7xJZkAivUnZ2dnUVZ_r3inZ2d[at]giganews.com> ,
W <persistentone[at]spamarrest.com> wrote:

- quote -

If you paid over par for it, you'll pay less taxes prior to maturity.

- quote -

The law says it isn't that the capital appreciates, but rather that
you're earning interest.

If you buy a bond at par, that's a capital purchase, and all the
capital is at risk, but the income is still interest.

- quote -

Why would it be?

Seth

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W <persistentone[at]spamarrest.com> wrote:

- quote -

I think in almost all real cases the TP does not want to
elect to report taxable bond market discount amortization
as it occurs each tax year. But it was pointed out here
in a recent thread that this would have the effect of
spreading the income into more tax years, thus possibly
hitting a lower tax bracket.

Steve

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<removeps-groups[at]yahoo.com> wrote in message
news:0f317e60-5781-4db3-b006-ace7acc51235[at]l22g2000vba.googlegroups.com...
- quote -

Again, I cannot understand why anyone would want to amortize a bond. These
days you don't have any certainty of getting your principal back, so why
accelerate the repayment of principal reported on your tax return by
amortizing?
If muni bonds are required to be amortized, I guess that gives me
a reason to never buy one. Our cities can thank the Federal Government for
that. Who needs that kind of hassle and time killing complexity to make 4%
interest rates?

If you buy the corporate bond at $92, and get repayment of the original bond
face value of $100 in > 12 months, I hear half the people responding to this
thread saying it is capital gains and the other half saying that it is not.
I gather
the recent IRS rules are that this is "interest".

It seems like this should be a capital gains event since it does involve a
capital purchase, and *the capital is at risk of total loss*, and the
capital
does appreciate in greater than 12 months. It's a shame if the government
has created one more complex twist to make things intolerably complicated
when they don't need to be.

How does the government view someone who pays $80 for a Ford Bond and
ends up selling it for $20? This is considered a short term capital loss
even
when it is long term?

--
W

--
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On Mar 8, 3:52 pm, "removeps-gro...[at]yahoo.com" <removeps-
gro...[at]yahoo.com> wrote:

- quote -

Last sentence above does not look correct to me. The amortization on
discount bonds is not deductible on Schedule A, but is rather added as
interest on Schedule B. And yes, there is no capital gain/loss at the
end. I said you get a deduction and no capital gain/loss at the end,
which obviously makes no sense!

- quote -

Again, last sentence above is not correct. You would have to add
amortization to the coupon interest.


- quote -

Amortizing all your taxable bonds does not make sense because you have
to report the discount as ordinary income, which is taxed at a higher
rate.

--
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On Mar 8, 2:18 pm, "W" <persistent...[at]spamarrest.com> wrote:

- quote -

For practical purposes, isn't the principal $92 since that's what you
paid for the bond? The repayment of the real face value or principal
of $100 constitutes $8 profit.

If the bond is a muni, you have to amortize it. If the bond is a
corporate, the default is to not amortize, although you can elect to
amortize it as stated in http://www.irs.gov/publications/p550...blink100010264.

- quote -

One more question. Was it an original issue at $92? If yes, then:
Assuming the corporate pays no interest and you're not amortizing (the
default), then all of the $8 is a capital gain. If you were
amortizing, then part of the $8 would be deductible in each year on
Schedule A Misc deductions not subject to 2% floor or AMT, and there
is no capital gain/loss at the end. If the bond pays interest, and
you're not amortizing, then you just report the interest on Schedule
B. If you are amortizing, then you reduce your interest on Schedule B
by the amortization, and only if this is less than zero do you deduct
the remainder on Schedule A Misc deductions not subject to 2% floor.

If you bought the bond on the secondary market, then you have to
calculate the true price of the bond at the time you bought it for
$92. I imagine this calculation depends on the price of the bond when
it was originally issued and the number of years to maturity when it
was originally issued. Say it was originally issued at $70 and
matured in 10 years. So the true price increases $3 a year. Say you
bought it 1.5 years before maturity, so the true price is $100-$3*1.5=
$95.50. But if you use the constant yield method, the formula is more
complicated (I haven't figured it out yet) and you get a different
number. You bought it for $92. So $3.50 is ordinary income
reportable on Schedule B, and the rest is capital gain. The $3.50 is
by default reportable all at once in the year of sale, but you can
elect to pay it each year you hold the bond per
http://www.irs.gov/publications/p550...blink100010023.

If you're amortizing your taxable bonds and there is a market
discount, I have no idea what happens then, or if there are special
rules.


- quote -

If you amortize bonds, you get a deduction every year, which lowers
your income, and you don't have to deal with capital gains at the end.


Disclaimer: I'm new to all this bond stuff, so some things I said may
not be correct.

--
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Bill <an_ordinary_guy_158[at]hotmail.com> wrote:

- quote -

I think in the distant past this was true, but for the
past decade or more the IRS wants to tax this difference
between market discount and face value as regular interest
income, payable generally in the year of sale/maturity,
the mechanics for this being described in detail
in several recent threads here.

It's pretty confusing because other places in their publications
the IRS states very clearly that bonds are "capital gain property".


Steve

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<removeps-groups[at]yahoo.com> wrote in message
news:74941173-91c6-47b1-a5a8-a708b1a2a9cf[at]w34g2000yqm.googlegroups.com...
- quote -

It wouldn't matter if it is zero bond, because the original question was
about the repayment of the *principal*.

Assume it is a corporate bond, not a muni.

What are the options to amortize the bonds? Why would someone do that?

--
W

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >

"W" <persistentone[at]spamarrest.com> wrote in message
news:zOidnQA3Pp1ztS7UnZ2dnUVZ_vjinZ2d[at]giganews.com...
- quote -

The simple answer is no, the $8 is regarded as interest (at least for bonds
bought after 1993). The more complex answer is concerned with how that
interest is taxed (in the case of a muni bond, it may or may not be taxable;
it is always taxable for taxable bonds), and when the income is recognized
(imputed as you go along, or at maturity).

Here's an entry point into Pub 550 that should get you started on tax
treatment of market discount bonds:
http://www.irs.gov/publications/p550...blink100057907

Mark Freeland
nNeEwTs[at]nyc.rr.com

--
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On Mar 7, 7:29 pm, "W" <persistent...[at]spamarrest.com> wrote:

- quote -

Is the bond zero coupon? Is it a muni? Did you elect to amortize all
your taxable bonds?

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persistentone[at]spamarrest.com (W) posted:

- quote -

Yes, Long Term. And anytime you sell anything for more than you bought
it, the difference is a capital gain. The 12-month holding period
simply qualifies it as a long-term gain, which is taxed at a lower rate.

Bill

--
<< ------------------------------------------------------- > << The foregoing was not intended or written to be used, > << nor can it used, for the purpose of avoiding penalties > << that may be imposed upon the taxpayer. > << > << The Charter and the Guidelines for submitting posts > << to this newsgroup as well as our anti-spamming policy > << are at www.asktax.org. > << Copyright (2007) - All rights reserved. > << ------------------------------------------------------- >