Bonds

<div class="Section1">On sale or redemption at maturity of Treasury notes and bonds, the proceeds must be separated into identifiable components for tax purposes.<div class="Section1"><br /> <br /> (1) If the sale occurs between interest dates, as it generally does, the seller usually receives from the buyer an amount stated separately from the purchase price representing stated interest accrued to the date of sale, but not yet due. This is reported by the seller as interest income, not gain.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> (2) Out of the proceeds (other than interest, discussed above) an amount equal to the taxpayer&rsquo;s adjusted basis in the note or bond and expenses of sale is recovered tax-free.<a href="#_ftn2" name="_ftnref2">²</a> The taxpayer&rsquo;s basis is generally the cost of acquisition adjusted by (i) adding any original issue discount (OID) and market discount included in income as it accrued,<a href="#_ftn3" name="_ftnref3">³</a> <em>or</em> (ii) subtracting the amount of premium deductible or applied to reduce interest payments over the period the taxpayer held the bond if he or she elected to amortize the premium (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7644">7644</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7650">7650</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7654">7654</a>).<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> (3) As a general rule, amounts in excess of (1) and (2) are treated as capital gain (long-term or short-term, depending on the holding period and the date of acquisition). <em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="699">699</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for more information on the calculation of holding periods and the treatment of capital gains and losses. However, in the following special circumstances part or all of the gain must be treated as ordinary income:<br /> <br /> (a) If the note or bond was issued after July&nbsp;18, 1984, or if the note or bond was issued on or before July&nbsp;18, 1984, and was purchased on the market after April&nbsp;30, 1993, gain equal to market discount accrued up to the date of disposition and not previously included in income is treated as interest income, not capital gain (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7645">7645</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7647">7647</a>).<a href="#_ftn5" name="_ftnref5">⁵</a> If a bond was issued on or before July&nbsp;18, 1984, but acquired after that date at a market discount using <em>borrowed funds</em>, a part or all of the gain must be treated as ordinary income to the extent that a deferred interest expense deduction is taken (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8046">8046</a>).<br /> <br /> (b) If a note or bond originally issued on or before July&nbsp;1, 1982, and after December&nbsp;31, 1954, was originally issued at a discount of &frac14; of 1&nbsp;percent (.0025) or more of the stated redemption price multiplied by the number of full years from issue to maturity and the holder did not pay a premium for it, any <em>gain</em> realized must be treated as ordinary income up to a prorated portion of the original issue discount.<a href="#_ftn6" name="_ftnref6">⁶</a> (The prorated portion is explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7651">7651</a>.)<br /> <br /> If the seller purchased the note or bond at a premium (i.e., at a price in excess of the face amount of the obligation), none of the gain is original issue discount.<a href="#_ftn7" name="_ftnref7">⁷</a> A holder is considered to have purchased at a premium if the holder&rsquo;s basis is the same, in whole or in part, for purposes of determining gain or loss from a sale or exchange as the basis in the hands of another person who purchased at a premium. Thus, for example, a donee is considered to have purchased at a premium if the donor did.<a href="#_ftn8" name="_ftnref8">⁸</a><br /> <br /> (c) With respect to bonds issued before January&nbsp;1, 1955, the IRC did not deal with the problem of original issue discount. Despite this, the Supreme Court has ruled that under the pre-1954 Code, original issue discount &ldquo;serves the same function as stated interest&rdquo; and &ldquo;earned original issue discount, like stated interest, should be taxed &hellip; as ordinary income&rdquo; when realized.<a href="#_ftn9" name="_ftnref9">⁹</a> However, gain or loss from <em>retirement</em> of a bond is capital gain or loss only if the bond was issued with coupons attached or in registered form or was in such form on March&nbsp;1, 1954.<a href="#_ftn10" name="_ftnref10">¹⁰</a><br /> <br /> (4) If there was no gain, the loss is treated as a capital loss (long-term or short-term, depending on the length of the holding period (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="699">699</a>)). If &ldquo;substantially identical&rdquo; obligations were acquired (or a contract to acquire them was made) within 30 days before or 30 days after the sale, the loss will be subject to the &ldquo;wash sale&rdquo; rule discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7537">7537</a>. If the sale is made to a related person, the loss deduction may be disallowed (<em><em>see</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="701">701</a>).<br /> <br /> If a Treasury bond or note was held as part of a tax straddle, the additional rules and qualifications explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7593">7593</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7614">7614</a> apply; if the bond or note was held as part of a conversion transaction, the additional rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7615">7615</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7616">7616</a> will apply.<br /> <br /> For the rules governing the substitution of newly issued bonds for outstanding bonds, <em><em>see</em> </em>Revenue Procedure 2001-21.<a href="#_ftn11" name="_ftnref11">¹¹</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.61-7(d).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1001(a).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp; IRC &sect;&sect;&nbsp;1272(d), 1276(d)(2), 1278(b)(4); General Explanation&ndash;TRA &rsquo;84, p.&nbsp;99.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1016(a)(5).<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1276.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(c)(2).<br /> <br /> <a href="#_ftnref7" name="_ftn7">7</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(a)(2)(B).<br /> <br /> <a href="#_ftnref8" name="_ftn8">8</a>.&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.1232-3(d)(2).<br /> <br /> <a href="#_ftnref9" name="_ftn9">9</a>.&nbsp;&nbsp; <em>U.S. v. Midland-Ross Corp.,</em> 381 U.S. 54 (1965).<br /> <br /> <a href="#_ftnref10" name="_ftn10">10</a>.&nbsp;&nbsp; IRC &sect;&nbsp;1271(c).<br /> <br /> <a href="#_ftnref11" name="_ftn11">11</a>.&nbsp;&nbsp; 2001-1 CB 742.<br /> <br /> </div></div><br />

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.

Scott Curtis, head of Raymond James Private Client group, explains the firms growth goals, regulatory pressures and outlook on the industry.