Cashed in a Bond

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?”

Hi DD,

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).
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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.
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 And remember, you can find answers to all kinds of questions about bond basis and other tax issues, free. Where? Where else? At

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