Question about treasury bond capital gains

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nmdar
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Joined: Tue Sep 03, 2019 7:04 pm

Question about treasury bond capital gains

Post by nmdar »

I am a new investor and have a question about individual treasury bond capital gains. Lets say you buy a treasury bond at a discount lets say 97$ (par value 100) on the secondary market and hold to maturity (4 more years from the date of buying). The coupon rate on the bond is 0.5%. The yield to maturity is approximately 1.2%. However in terms of actual payments you would only be paid 0.5% each year on the facevalue of the bond. So in effect the YTM is actually coming from selling the bond at par value at the time of maturity. Does this mean that most of the yield is coming from long term capital gains on the bond rather than interest payments per year. So for tax purposes you are actually converting the interest to long term capital gains? I am just trying to figure out if I understand this correctly.
Thanks for any responses.
w5000
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Joined: Mon Feb 10, 2020 8:33 pm

Re: Question about treasury bond capital gains

Post by w5000 »

Well, I don't completely understand all the aspects of taxes on bonds, but I think under certain conditions that even if you buy a bond on the secondary market, you still need to report OID (original issue discount) income every year, so that would be regular income.
fabdog
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Location: Williamsburg VA

Re: Question about treasury bond capital gains

Post by fabdog »

If you buy the instrument at a discount, the discount will be amortized over time and reported as OID (Original issue discount) and will be taxable income to you

If you buy at a premium, the premium will be amortized over time and reported as ABP (amortized bond premium) and can be deducted from your interest, as you are having the premium refunded to you

From the IRS

https://www.irs.gov/pub/irs-pdf/p1212.pdf

there won't be a capital gain/loss unless you sell the security in question

Mike
Topic Author
nmdar
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Joined: Tue Sep 03, 2019 7:04 pm

Re: Question about treasury bond capital gains

Post by nmdar »

Fabdog that was very helpful thanks a lot!
MisterMister
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Joined: Thu Nov 01, 2018 9:50 pm

Re: Question about treasury bond capital gains

Post by MisterMister »

Old thread, but some inaccurate information was provided here.

Treasury bonds bought on the secondary market at less than par have market discount and normally not OID. And the discount is generally not accreted annually, rather the tax is paid on the discount at maturity (unless sold early). If held to maturity there are no capital gains.

All this and much more is discussed in the huge thread here: viewtopic.php?t=390405, where the first post is particularly helpful.
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