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.
Question about treasury bond capital gains
Re: Question about treasury bond capital gains
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.
Re: Question about treasury bond capital gains
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
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
Re: Question about treasury bond capital gains
Fabdog that was very helpful thanks a lot!
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Re: Question about treasury bond capital gains
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.
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.