Tax planning for bond transactions

If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the real property you received in the trade. If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. You generally have unstated interest if your interest rate is less than the applicable federal rate. For more information, see Unstated Interest and Original Issue Discount (OID) in Pub. Gains and losses derived in the ordinary course of a commodity or option dealer’s trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. In addition, the rules relating to contributions to self-employment retirement plans apply.

Interest expense and other investment expenses that an investor would deduct on Schedule A (Form 1040) are deducted by a trader on Schedule C (Form 1040), Profit or Loss From Business, if the expenses are from the trading business. Commissions and other costs of acquiring or disposing of securities or commodities (depending upon which election was made) are not deductible but must be used to figure gain or loss. The limit on investment interest expense, which applies to investors, does not apply to interest paid or incurred in a trading business. The result after combining these items with your other long-term capital gains and losses is your net long-term capital gain or loss (line 15 of Schedule D (Form 1040)). Use Form 6781 to report gains and losses from section 1256 contracts and straddles before entering these amounts on Schedule D (Form 1040). On February 10, 2022, you closed out the section 1256 contract at a $500 loss and disposed of the non-section 1256 position for $975.

Some mutual funds and REITs keep their long-term capital gains and pay tax on them. You must treat your share of these gains as distributions, even though you did not actually receive them. As investors seek to insulate their portfolio from inflation fiscal quarter and the ups and downs in the stock market, many have turned to Series I savings bonds (I bonds). Because of the high inflation rate, I bonds are now paying an interest rate of 6.89%, which is a healthy, safe return on your investment.

Zero-coupon bonds are issued by governments at discounts, and they mature at par values, where the amount of the spread is divided equally among the number of years to maturity. Consequently, zero-coupon bonds are taxed as interest, just like any other original issue discount bond. If you’re worried about taxes, you might consider municipal bonds as a reasonable middle ground. Investors in TIPS may be surprised by each year’s tax liability relative to the cash received.

This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. All Series E bonds have matured and are no longer earning interest. Series EE bonds were first offered in January 1980 and have a maturity period of 30 years; they were offered in paper (definitive) form until 2012.

Closing Thoughts on I-Bond Tax Considerations

However, the essential government function requirement does not apply to tribal economic development bonds issued after February 17, 2009, for tax-exempt treatment. Interest on private activity bonds (other than certain bonds for tribal manufacturing facilities) is taxable. Interest on a state or local government obligation may be tax exempt even if the obligation is not a bond. For example, interest on a debt evidenced only by an ordinary written agreement of purchase and sale may be tax exempt.

  • Under your last entry on line 1, put a subtotal of all interest listed on line 1.
  • The total adjusted basis of all the shares you owned just before the sale is $4,500, figured as follows.
  • A straddle may consist of a purchased option to buy and a purchased option to sell on the same number of shares of the security, with the same exercise price and period.
  • Like all savings bonds, I bonds are known as “registered” securities.

You recognize a $600 short-term capital gain from the constructive sale and your new holding period in the Baker stock begins on September 9. On January 10, 2022, you bought a mutual fund share for $40. On February 7, 2022, the mutual fund paid a $5 dividend from tax-exempt interest, which is not taxable to you. If it were not for the tax-exempt dividend, your loss would be $6 ($40 − $34). However, you must increase the sales price from $34 to $39 (to account for the $5 portion of the loss that is not deductible).

If you transfer property to a corporation solely in exchange for stock in that corporation, and immediately after the trade you are in control of the corporation, you will ordinarily not recognize a gain or loss. This rule applies both to individuals and to groups who transfer property to a corporation. It does not apply if the corporation is an investment company. Later, you presented the bond and $50 and received one share of XYZ Corporation common stock.

Tax aspects of inflation-indexed bonds

If you received property as a gift after 1976, your basis is the donor’s adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. You figure this part by multiplying the gift tax paid on the gift by a fraction. The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. Worthless securities also include securities that you abandon after March 12, 2008.

Investment and Self-employment taxes done right

Generally, your deduction for investment interest expense is limited to your net investment income. Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. You can deduct in each year only the interest for that year.

Taxation of Zero-Coupon Bonds

An option that entitles the purchaser to buy, at any time before a specified future date, property such as a stated number of shares of stock at a specified price. An accounting method under which you report your income when you earn it, whether or not you have received it. You generally deduct your expenses when you incur a liability for them, rather than when you pay them. The fastest way to receive a tax refund is to file electronically and choose direct deposit, which securely and electronically transfers your refund directly into your financial account. Direct deposit also avoids the possibility that your check could be lost, stolen, destroyed, or returned undeliverable to the IRS. Eight in 10 taxpayers use direct deposit to receive their refunds.

What Are Deductible Investment Interest Expenses?

If you make the election, you must recognize gain on the sale only to the extent the proceeds from the sale exceed the cost of the qualified replacement property. Treat the loss on the sale of one or more positions (the loss position) of a straddle as a long-term capital loss if both the following are true. On December 2, 2022, you bought stock in XX Corporation (XX stock) and an offsetting put option. On December 9, 2022, there was $20 of unrealized gain in the put option and you sold the XX stock at a $20 loss.

Government Bonds

The holding period of a position in a straddle generally begins no earlier than the date on which the straddle ends (the date you no longer hold an offsetting position). This rule does not apply to any position you held more than 1 year before you established the straddle. The rules for coordinating straddle losses and wash sales do not apply to the following loss situations.

Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem. In any year, you cannot deduct more in investment interest than you earned in investment income. However, you can carry forward your “disallowed” investment interest to the next year.

Your basis in the 70 shares of the new stock is still $3,500. You may no longer use the double-category method for figuring your average basis. You can figure your gain or loss using a cost basis only if you did not previously use an average basis for a sale, exchange, or redemption of other shares in the same mutual fund. If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is figured differently.

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