Capital gains\/losses on bonds work in essentially the same manner as stocks and other securities. Tax
\nlots apply as does first in, first out sales rules, unless a special purchase is identified. There are a few
\ndifferences to be aware of and this lesson touches on those.<\/p>\n
US Treasury Bills are sold at a discount and do not pay interest (coupon) during their life. The difference
\nbetween the price paid and the face value of the bond is interest. There is no gain or loss at maturity.
\nRather the difference is interest income and is reported as such on your tax return. It is also reported in
\nthis manner on your 1099 information reporting at year-end.<\/p>\n
A tax compliance tip: Even though an item has no gain or loss, the sale, or in this case redemption, must
\nbe reported on your tax return. Brokers\u2019 information reporting will include zero gain\/loss items and even
\nthough they have no impact on tax liability, they must be reported as the IRS looks to match the broker submitted reporting to your tax return submission. Failure to report these items will generate IRS \u2013
\nCP2000 notices requesting additional information and possibly tax from you.<\/p>\n
The treatment of corporate bonds for calculating gain or loss is exactly the same as the treatment for
\nstocks. Keep in mind that the maturity of a bond is a disposal of the holding and must be reported.<\/p>\n
We think of muni bonds as always being federally tax-free and, and if they are from your resident state,
\nstate tax-free. Not quite. Capital gains and losses on these bonds are subject to both federal and state
\ntax when sold or held to maturity. Interest income is exempt from federal taxes, and state taxes if you
\nare a resident of the state the muni was issued by.<\/p>\n
Bond premiums and discounts are added to and subtracted from the cost basis of a bond over the life of
\na bond. Bonds purchased after January 1, 2013 are covered securities and therefore your broker will
\nprovide the necessary information to you. Bonds purchased before this date require more record-keeping on the part of the taxpayer. The cost plus or minus any market discount or premium amortized
\nover the holding period of the bond is the simplest calculation of the basis.<\/p>\n","protected":false},"excerpt":{"rendered":"
The main topics of this lesson are: US Treasury Bills; Corporate & Municipal Bonds; and Bond Premiums and Discounts. For this lesson refer to the Study Notes and watch the video for a synopsis.<\/p>\n","protected":false},"author":929,"featured_media":221454,"parent":0,"comment_status":"open","ping_status":"open","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[13576],"traders-academy":[13125,13128,13132],"class_list":{"0":"post-175796","1":"trading-lessons","2":"type-trading-lessons","3":"status-publish","4":"has-post-thumbnail","6":"contributors-categories-interactive-brokers","7":"traders-academy-beginner-trading","8":"traders-academy-level","9":"traders-academy-trading-lesson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\n