Today TaxMama hears from DD in the TaxQuips Forum, who’s bewildered. “His wife’s aunt gave her a municipal bond, which was just called. They were paid face value for the bond. But how do they figure out the basis?”
Good news! Figuring out a bond’s basis is much easier than understanding that of a stock basis. Bonds don’t split, or do strange things. They just sit there, paying out interest – or not.
Why not contact the issuer of the bond? I suspect that the bond’s basis IS the face value. Why?
1) When you buy a bond for less than the face value, you pay tax on the original issue discount (the amount that is lower than the face value).
2) When you pay more than the face value, the excess is typically treated as interest – so you reduce the first few interest payments until you break even.
3) All the interest income on the bond was already reported as non-taxable interest – at least to the IRS. If the interest was received in another state – it should have been taxed in that state.
So, when it comes to long-term municipal bonds like that, the face value probably IS the basis.
And remember, you can find answers to all kinds of questions about bond basis and other tax issues, free. Where? Where else? At www.TaxMama.com.
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