T-bill or T-Bond tax reporting if sold before maturity

[BMK]

@Sig

What I recommended is that the taxpayer should identify how much of the sales proceeds are accrued interest, and break out that portion and report it as interest. The remaining amount of the proceeds is the true price of the bond, whether it is sold at a premium or at a discount. If you use that remaining amount to calculate the gain or loss, then that is the true capital gain or loss. Doing it in this way does NOT treat capital gain as interest.

With that being said...

On the federal tax return, interest is often taxed at a higher rate than capital gain. So if you somehow fouled it up and incorrectly reported capital gain as interest, you might actually be paying too much tax to the federal government.

On the other hand, on the state tax return, interest from the US Treasury is excluded altogether. That's what triggered the original question...

BMK

 

[Sig]

@Sig

What I recommended is that the taxpayer should identify how much of the sales proceeds are accrued interest, and break out that portion and report it as interest. The remaining amount of the proceeds is the true price of the bond, whether it is sold at a premium or at a discount. If you use that remaining amount to calculate the gain or loss, then that is the true capital gain or loss. Doing it in this way does NOT treat capital gain as interest.

With that being said...

On the federal tax return, interest is often taxed at a higher rate than capital gain. So if you somehow fouled it up and incorrectly reported capital gain as interest, you might actually be paying too much tax to the federal government.

On the other hand, on the state tax return, interest from the US Treasury is excluded altogether. That's what triggered the original question...

BMK

That's the crux of the question though. On a bond that's just sold at a discount to face value to reflect interest, how do you determine the breakout between accrued interest and capital gains?

 

[BMK]

On a bond that's just sold at a discount to face value to reflect interest, how do you determine the breakout between accrued interest and capital gains?

The amount of accrued interest should remain constant throughout the day. It is determined by a straightforward calculation that is based on the number of days to maturity.

The price of the bond itself will fluctuate during the day...

BMK

 

[Sig]

The amount of accrued interest should remain constant throughout the day. It is determined by a straightforward calculation that is based on the number of days to maturity.

The price of the bond itself will fluctuate during the day...

BMK

Right, so if I bought a 30 year bond at a X discount to face value with Y days left to maturity I'd use that discount to impute an interest rate. Then apply that interest rate to the day's I'd held the bond and add that to the price I paid for the bond. And any discount or premium that my sales price represented to that number would be a capital gain or loss. That's a methodology of teasing out the interest portion and the capital gains portion since you can't just take the price you sold at minus the price paid and call it all interest. My question is if its the right methodology?

 

[BMK]

When I place an order at Schwab to buy or sell bonds, the order entry screen shows me the total price, with a breakdown. It shows what portion is interest and what portion is premium (or discount). I've attached a couple screenshots...

 

[Sig]

When I place an order at Schwab to buy or sell bonds, the order entry screen shows me the total price, with a breakdown. It shows what portion is interest and what portion is premium (or discount). I've attached a couple screenshots...

View attachment 241573 View attachment 241575

That's a bond with a coupon. Some of the same problem if you bought it at a discount or premium but easier to abstract the problem if you think about zero coupon bonds.

 

[TimMykes]

Thanks BMK for your detailed answer.

My own research came up with more or less the same idea. Never had to 'invent' a 1099-int that wasn't actually issued, so that was the source of the confusion.

There is a standard formula I've seen for calculating the implied interest vs any capital gain that might have accrued.

Think breaking out the 1099-INT will do the trick as far as State exemption is concerned.