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When you buy a bond at a discount, the difference between your
purchase price and its par is considered interest for tax purposes. Your
broker will issue an original issue discount (OID) for you to report your
taxable interest amount each year. For example, if you buy a $1,000
bond at a discount price of $900, and it matures in five years, your OID is
$100. You must report $20 of OID income each year. IRS Form 1099-OID
shows the amount of OID income you owe for each year you own the bond. If
you buy a bond at a premium, you do not report the difference on your current
tax return.
You may owe capital gains taxes if you earned money from selling
your bond at a premium. Short-term gains (on bonds held 12 months or less) are taxed as regular income. Long-term gains (on bonds
held more than 12 months) are taxed at rates slightly lower than those of regular
income.
To determine whether you have earned capital gains, you must
first determine your basis. When you first purchase a bond, its
basis is equal to the original price you pay for it. The difference
between what you receive for the bond when you sell it and its basis is the
amount of your taxable gain or loss. |
