Taxation of Treasury bills, notes and bonds

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Electron
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Re: Taxation of Treasury bills, notes and bonds

Post by Electron »

GaryA505 wrote: Wed Nov 30, 2022 9:11 pm That's a great idea. Since the coupon is so low, interest on $100000 would only be about $125 on 1/15/2023 and about the same on 7/15/2023, and most of the interest (gain) would be realized on 1/15/2024?
Any gotchas?
Make sure you don't make the election to report accrued market discount annually instead of at maturity. See the beginning of this thread for more information.

The coupon amounts are fixed. With $100,000 face value at 0.125% the coupon income would be $125.00 per year, or $62.50 at each 6 month coupon payment date.
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Re: Taxation of Treasury bills, notes and bonds

Post by GaryA505 »

Electron wrote: Wed Nov 30, 2022 10:55 pm
GaryA505 wrote: Wed Nov 30, 2022 9:11 pm That's a great idea. Since the coupon is so low, interest on $100000 would only be about $125 on 1/15/2023 and about the same on 7/15/2023, and most of the interest (gain) would be realized on 1/15/2024?
Any gotchas?
Make sure you don't make the election to report accrued market discount annually instead of at maturity. See the beginning of this thread for more information.

The coupon amounts are fixed. With $100,000 face value at 0.125% the coupon income would be $125.00 per year, or $62.50 at each 6 month coupon payment date.
Ya, maybe it's too complicated and I might mess it up. I think I'll just wait until January and buy a 52 week Tbill. That's a no-brainer.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

protagonist wrote: Wed Nov 30, 2022 9:41 pm Thank you for doing this, Kevin.

I only own TIPS, no nominal Treasuries, and have purchased them all via Fidelity via the secondary market.

Perhaps I am hoping for too much, but I am hoping that all the information necessary will be clearly marked on Fidelity's end of year tax documents (1099s), and standard tax software (like H+R Block or Turbotax) will make it easy to enter the information in the appropriate places.

Am I correct, or will this be more complicated?
You're welcome! :sharebeer

Well, that's why we have this thread. I have not done a tax return with TIPS involved, so can't speak from experience. I will be doing several of them for 2022.

My understanding is that the inflation adjustments should be reported on 1099-OID, and perhaps the stated interest as well, but someone with actual experience can chime in.

There might have been a potential issue with the accrued market discount (and/or OID) not being reported correctly on 1099-OID in the past (cue #Cruncher), but I don't know if that's still the case with covered securities. If it is still an issue, we will have fun sorting it out here.

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Re: Taxation of Treasury bills, notes and bonds

Post by protagonist »

Kevin M wrote: Thu Dec 01, 2022 2:04 am
protagonist wrote: Wed Nov 30, 2022 9:41 pm Thank you for doing this, Kevin.

I only own TIPS, no nominal Treasuries, and have purchased them all via Fidelity via the secondary market.

Perhaps I am hoping for too much, but I am hoping that all the information necessary will be clearly marked on Fidelity's end of year tax documents (1099s), and standard tax software (like H+R Block or Turbotax) will make it easy to enter the information in the appropriate places.

Am I correct, or will this be more complicated?
You're welcome! :sharebeer

Well, that's why we have this thread. I have not done a tax return with TIPS involved, so can't speak from experience. I will be doing several of them for 2022.

My understanding is that the inflation adjustments should be reported on 1099-OID, and perhaps the stated interest as well, but someone with actual experience can chime in.

There might have been a potential issue with the accrued market discount (and/or OID) not being reported correctly on 1099-OID in the past (cue #Cruncher), but I don't know if that's still the case with covered securities. If it is still an issue, we will have fun sorting it out here.

Kevin
Thanks again, Kevin!
I will humbly await your experience. If I wind up with anything to report that I think may be helpful I will do so.
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Naive Treas Bill Question

Post by boater07 »

[Thread merged into here --admin LadyGeek]

When I cash in some bills at maturity, can I treat that as a CG or will it be reported as interest?
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Re: Naive Treas Bill Question

Post by exodusNH »

boater07 wrote: Mon Dec 05, 2022 11:39 am When I cash in some bills at maturity, can I treat that as a CG or will it be reported as interest?
In almost all cases, it's interest income at your Federal marginal tax rate.

Edit to add the Federal qualifier.
Last edited by exodusNH on Mon Dec 05, 2022 12:42 pm, edited 1 time in total.
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Re: Naive Treas Bill Question

Post by lakpr »

exodusNH wrote: Mon Dec 05, 2022 11:59 am
boater07 wrote: Mon Dec 05, 2022 11:39 am When I cash in some bills at maturity, can I treat that as a CG or will it be reported as interest?
In almost all cases, it's interest income at your Federal marginal tax rate.
Added the qualifier in red. Treasury bill interest is state-tax exempt. Just being pedantic ...
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Re: Taxation of Treasury bills, notes and bonds

Post by LadyGeek »

I merged boater07's thread into the ongoing discussion.

(Thanks to the member who reported the post and provided a link to this thread.)
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Re: Naive Treas Bill Question

Post by Kevin M »

boater07 wrote: Mon Dec 05, 2022 11:39 am [Thread merged into here --admin LadyGeek]

When I cash in some bills at maturity, can I treat that as a CG or will it be reported as interest?
This is answered in the OP:
Kevin M wrote: Tue Nov 15, 2022 7:26 pm <snip<
Treasury bills are the easiest to understand. Say you pay $990 for $1,000 of face value (this is the minimum at a broker). At maturity you'll receive $1,000; $10 of this will be reported as interest in box 3 of 1099-INT for the year of maturity. IRS publications refer to this $10 as accrued acquisition discount.

Treasury bill interest (accrued acquisition discount) is exempt from state and local income tax, as is anything reported in box 3 of 1099-INT. All of this is true whether you buy at auction or on the secondary market.

<snip>
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Re: Taxation of Treasury bills, notes and bonds

Post by Electron »

If anyone would like to defer income to 2024, there are a number of Treasury Notes trading in the secondary market with a 0.125% coupon that mature in 2024. Most of the income would be deferred to the year of maturity as accrued market discount.

This is a nice gift when you compare it with a zero coupon Treasury where imputed interest is reported every year.

Code: Select all

CUSIP      Issue          Maturity   Coupon  YTM bid ask

91282CBE0  Treasury Note  01/15/2024  0.125  4.774/4.719
91282CBM2  Treasury Note  02/15/2024  0.125  4.742/4.657
91282CBR1  Treasury Note  03/15/2024  0.250  4.720/4.656
91282CBV2  Treasury Note  04/15/2024  0.375  4.697/4.636
91282CCG4  Treasury Note  06/15/2024  0.250  4.630/4.576
91282CCL3  Treasury Note  07/15/2024  0.375  4.560/4.516
91282CCT6  Treasury Note  08/15/2024  0.375  4.544/4.505
91282CCX7  Treasury Note  09/15/2024  0.375  4.474/4.440
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Re: Taxation of Treasury bills, notes and bonds

Post by Music Teacher Tim »

Excellent topic. If a T-Bill is purchased in the secondary market from a broker, the price paid to the broker will be either more or less than the price the Bill was originally issued at. So, aside from paying tax on the interest income at maturity, does the price difference in what you paid the broker and the original issue price become a cap gain or loss? For example, let's say a T-Bill was sold at auction for 97.50, the "interest" would be 2.50. But if I paid 98.00 for that Bill from a broker, I would still get 100.00 at maturity, so my "interest" would be 2.00. So do I then have a cap loss of 0.50? Or, is all of this accounted for on the broker's end, and all I have to worry about is the price to the broker?.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Music Teacher Tim wrote: Mon Dec 19, 2022 9:19 am Excellent topic. If a T-Bill is purchased in the secondary market from a broker, the price paid to the broker will be either more or less than the price the Bill was originally issued at. So, aside from paying tax on the interest income at maturity, does the price difference in what you paid the broker and the original issue price become a cap gain or loss? For example, let's say a T-Bill was sold at auction for 97.50, the "interest" would be 2.50. But if I paid 98.00 for that Bill from a broker, I would still get 100.00 at maturity, so my "interest" would be 2.00. So do I then have a cap loss of 0.50? Or, is all of this accounted for on the broker's end, and all I have to worry about is the price to the broker?.
No cap gain or loss if held to maturity. The accrued acquisition discount is taxed as interest in the year of maturity. It doesn't matter whether the bill is acquired at auction or on secondary.
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Re: Taxation of Treasury bills, notes and bonds

Post by Music Teacher Tim »

That's what I was hoping. In a case like that, I guess the difference in the issue price and the secondary market price would be the cap gain or loss for the broker, not the buyer. I was somehow thinking the whole chain of events ended up in my lap, but all I should be concerned with is the profit (interest) I made. And I guess if I were to sell a T-Bill before maturity, I would deal with the gain or loss, but not the next buyer. I'm just repeating back to see if I'm wrapping my head around this right. Thanks.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Music Teacher Tim wrote: Mon Dec 19, 2022 2:50 pm That's what I was hoping. In a case like that, I guess the difference in the issue price and the secondary market price would be the cap gain or loss for the broker, not the buyer. I was somehow thinking the whole chain of events ended up in my lap, but all I should be concerned with is the profit (interest) I made. And I guess if I were to sell a T-Bill before maturity, I would deal with the gain or loss, but not the next buyer. I'm just repeating back to see if I'm wrapping my head around this right. Thanks.
The broker is just the intermediary. Whoever sells the bill deals with any accrued acquisition discount and capital gain/loss upon the sale. You start fresh as of the settlement date. It doesn't matter what the price at issue was.

If you sell bills before maturity, you will need to figure out how much of the earnings is cap gain/loss and how much accrued acquisition discount. Typically most will be the latter, but some may be the former.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Taxation of Treasury bills, notes and bonds

Post by Music Teacher Tim »

Got it. That was very helpful. I will keep watching this post and learning.
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Re: Taxation of Treasury bills, notes and bonds

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Thank you for this thread, it has been most informative.
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Re: Taxation of Treasury bills, notes and bonds

Post by Bcdkgf »

REDEMPTION PAYOUT UNITED STATES TREAS SER BL-2022 0.12500% 12/31/2022 NTS NOTE (Cash)

This matured on Dec 31 (a Saturday). Fidelity is showing the matured value as a short term capital gain for the tax year 2023? Is this correct? I thought the gain would be treated as interest for tax year 2022. I did receive a separate line item for the interest related to this bond for tax year 2023. The bond processed on Jan 3 and shows as sold (Matured)

If it could be treated as a capital gain, I have some short term accrued capital losses so I could negate this gain for tax purposes?

I have to edit this, the interest actually shows up for 2023 tax year.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Bcdkgf wrote: Wed Jan 04, 2023 6:31 am REDEMPTION PAYOUT UNITED STATES TREAS SER BL-2022 0.12500% 12/31/2022 NTS NOTE (Cash)

This matured on Dec 31 (a Saturday). Fidelity is showing the matured value as a short term capital gain for the tax year 2023? Is this correct? I thought the gain would be treated as interest for tax year 2022. I did receive a separate line item for the interest related to this bond for tax year 2023. The bond processed on Jan 3 and shows as sold (Matured)

If it could be treated as a capital gain, I have some short term accrued capital losses so I could negate this gain for tax purposes?

I have to edit this, the interest actually shows up for 2023 tax year.
This is explained in the OP, so you might want to read that carefully. It's covered in the Treasury notes and bonds section. Brief summary: there will be an adjustment on the 1099-B that shows the accrued market discount, which I think will be all of what Fidelity is showing as STCG. Incidentally, I owned the same note at Fidelity, so I see the same things you're seeing.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Taxation of Treasury bills, notes and bonds

Post by Bcdkgf »

Kevin M wrote: Wed Jan 04, 2023 12:00 pm
Bcdkgf wrote: Wed Jan 04, 2023 6:31 am REDEMPTION PAYOUT UNITED STATES TREAS SER BL-2022 0.12500% 12/31/2022 NTS NOTE (Cash)

This matured on Dec 31 (a Saturday). Fidelity is showing the matured value as a short term capital gain for the tax year 2023? Is this correct? I thought the gain would be treated as interest for tax year 2022. I did receive a separate line item for the interest related to this bond for tax year 2023. The bond processed on Jan 3 and shows as sold (Matured)

If it could be treated as a capital gain, I have some short term accrued capital losses so I could negate this gain for tax purposes?

I have to edit this, the interest actually shows up for 2023 tax year.
This is explained in the OP, so you might want to read that carefully. It's covered in the Treasury notes and bonds section. Brief summary: there will be an adjustment on the 1099-B that shows the accrued market discount, which I think will be all of what Fidelity is showing as STCG. Incidentally, I owned the same note at Fidelity, so I see the same things you're seeing.
To clarify, Fidelity is mistakenly showing this as a short term capital gain, but when the 1099B is issued Fidelity will show as accrued Market discount for tax year 2023, even though the bond matured in 2022?
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Bcdkgf wrote: Wed Jan 04, 2023 12:31 pm
Kevin M wrote: Wed Jan 04, 2023 12:00 pm
Bcdkgf wrote: Wed Jan 04, 2023 6:31 am REDEMPTION PAYOUT UNITED STATES TREAS SER BL-2022 0.12500% 12/31/2022 NTS NOTE (Cash)

This matured on Dec 31 (a Saturday). Fidelity is showing the matured value as a short term capital gain for the tax year 2023? Is this correct? I thought the gain would be treated as interest for tax year 2022. I did receive a separate line item for the interest related to this bond for tax year 2023. The bond processed on Jan 3 and shows as sold (Matured)

If it could be treated as a capital gain, I have some short term accrued capital losses so I could negate this gain for tax purposes?

I have to edit this, the interest actually shows up for 2023 tax year.
This is explained in the OP, so you might want to read that carefully. It's covered in the Treasury notes and bonds section. Brief summary: there will be an adjustment on the 1099-B that shows the accrued market discount, which I think will be all of what Fidelity is showing as STCG. Incidentally, I owned the same note at Fidelity, so I see the same things you're seeing.
To clarify, Fidelity is mistakenly showing this as a short term capital gain, but when the 1099B is issued Fidelity will show as accrued Market discount for tax year 2023, even though the bond matured in 2022?
It's not a mistake, they just aren't showing the adjustment that will appear on 1099-B, and yes, the interest was received in 2023, so cash basis taxpayers report it for 2023.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Taxation of Treasury bills, notes and bonds

Post by Bcdkgf »

Kevin M wrote: Wed Jan 04, 2023 12:43 pm
Bcdkgf wrote: Wed Jan 04, 2023 12:31 pm
Kevin M wrote: Wed Jan 04, 2023 12:00 pm
Bcdkgf wrote: Wed Jan 04, 2023 6:31 am REDEMPTION PAYOUT UNITED STATES TREAS SER BL-2022 0.12500% 12/31/2022 NTS NOTE (Cash)

This matured on Dec 31 (a Saturday). Fidelity is showing the matured value as a short term capital gain for the tax year 2023? Is this correct? I thought the gain would be treated as interest for tax year 2022. I did receive a separate line item for the interest related to this bond for tax year 2023. The bond processed on Jan 3 and shows as sold (Matured)

If it could be treated as a capital gain, I have some short term accrued capital losses so I could negate this gain for tax purposes?

I have to edit this, the interest actually shows up for 2023 tax year.
This is explained in the OP, so you might want to read that carefully. It's covered in the Treasury notes and bonds section. Brief summary: there will be an adjustment on the 1099-B that shows the accrued market discount, which I think will be all of what Fidelity is showing as STCG. Incidentally, I owned the same note at Fidelity, so I see the same things you're seeing.
To clarify, Fidelity is mistakenly showing this as a short term capital gain, but when the 1099B is issued Fidelity will show as accrued Market discount for tax year 2023, even though the bond matured in 2022?
It's not a mistake, they just aren't showing the adjustment that will appear on 1099-B, and yes, the interest was received in 2023, so cash basis taxpayers report it for 2023.
Bummer, if I had known that the interest/maturity would be for 2023, I never would have bought this. Well, live and learn. Thanks for the info.
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Re: Taxation of Treasury bills, notes and bonds

Post by HereToLearn »

Bcdkgf wrote: Wed Jan 04, 2023 12:58 pm
Kevin M wrote: Wed Jan 04, 2023 12:43 pm
Bcdkgf wrote: Wed Jan 04, 2023 12:31 pm
Kevin M wrote: Wed Jan 04, 2023 12:00 pm
Bcdkgf wrote: Wed Jan 04, 2023 6:31 am REDEMPTION PAYOUT UNITED STATES TREAS SER BL-2022 0.12500% 12/31/2022 NTS NOTE (Cash)

This matured on Dec 31 (a Saturday). Fidelity is showing the matured value as a short term capital gain for the tax year 2023? Is this correct? I thought the gain would be treated as interest for tax year 2022. I did receive a separate line item for the interest related to this bond for tax year 2023. The bond processed on Jan 3 and shows as sold (Matured)

If it could be treated as a capital gain, I have some short term accrued capital losses so I could negate this gain for tax purposes?

I have to edit this, the interest actually shows up for 2023 tax year.
This is explained in the OP, so you might want to read that carefully. It's covered in the Treasury notes and bonds section. Brief summary: there will be an adjustment on the 1099-B that shows the accrued market discount, which I think will be all of what Fidelity is showing as STCG. Incidentally, I owned the same note at Fidelity, so I see the same things you're seeing.
To clarify, Fidelity is mistakenly showing this as a short term capital gain, but when the 1099B is issued Fidelity will show as accrued Market discount for tax year 2023, even though the bond matured in 2022?
It's not a mistake, they just aren't showing the adjustment that will appear on 1099-B, and yes, the interest was received in 2023, so cash basis taxpayers report it for 2023.
Bummer, if I had known that the interest/maturity would be for 2023, I never would have bought this. Well, live and learn. Thanks for the info.
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prepaid (accrued) interest and form 1099-INT?

Post by miket29 »

miket29's topic merged into thread here - mod mkc

last year was the first time I purchased Treasury bonds on the secondary market. I have a question about the interest that will be reported on the 1099-INT. Is the interest reported reduced by prepaid (accrued) interest paid when the bonds were purchased? The broker collected interest earned by the bond since the previous coupon date until my purchase so presumably they know the amount and could subtract it from the interest that comes from the coupon payments. Or do I somehow have to make an adjustment?

I looked at the IRS instructions at https://www.irs.gov/pub/irs-pdf/i1099int.pdf and it doesn't mention whether the accrued interest is included or not in box 1, nor could I find any mention of how to adjust the interest in that box. I'll be using Turbotax to prepare my taxes if that matters.
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Secondary Market Treasury Taxation Questions

Post by SlowMovingInvestor »

I bought some secondary Treasuries last year. Only one matured before the end of the year. I'm looking at preliminary 2022 Tax Info that Fidelity shows me for the purchase and redemption

I bought $10000 worth for $10085. My ticket shows a market price of $10,009, $76 in accrued interest.

I earned interest worth $163 in 2 payouts.

I got $10000 at redemption. Fidelity shows this for my cost basis
  • Original Cost $10,009
  • Adjusted Cost $10,000.00

I'm confused as to how to enter this on my tax return.

1) Presumably, I can take a loss of $10000 (redemption) - $10085 (purchase price) = -85 on short term capital losses? Do I have to adjust the basis manually to account for the accrued interest?

2) I have to enter interest of $170 on my Schedule B

Is that correct? It seems like a fair amount of work if I have to keep track of the accrued interest on each purchase manually, especially over multiple years.

Note that the Fidelity data I'm mentioning is their 'Tax Info' for 2022, not the official 1099s or TT downloads (not out yet), which might do all these adjustments automagically, thereby reducing manual work.

Thanks!

This thread has been merged into this on-going topic.

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Re: Secondary Market Treasury Taxation Questions

Post by Kevin M »

Please see this thread: Taxation of Treasury bills, notes and bonds. Your questions should be answered there. If not, you can post whatever you still don't understand in that thread if you want.
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Re: Secondary Market Treasury Taxation Questions

Post by Katietsu »

Go ahead and quickly review the thread Kevin linked. But, personally, I would wait until the 1099 is issued before spending more time on it than that. For me, I would say the main takeaway from Kevin’s post that is helpful to you right now is that there are a lot more boxes and lines available on a brokerage form than you might have used in the past.
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Re: Secondary Market Treasury Taxation Questions

Post by FactualFran »

The accrued interest and bond premium should be reported on an income tax return as adjustments to interest income, not capital losses. Schedule B should have the following sublines of line 1
  • "Fidelity" as payer with an amount including 163 (sum of the interest payments)
  • "Accrued Interest" as payer with an amount including -76
  • "Bond Premium" as payer with an amount including -9
Line 2 of Schedule B will be the sum of those for a net of $78 for that Treasury. After sublines for all the interest payers but before the sublines for the adjustments, there should be a "Subtotal" subline with the sum of the amounts from all the interest payers.
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Re: Secondary Market Treasury Taxation Questions

Post by SlowMovingInvestor »

FactualFran wrote: Tue Jan 17, 2023 11:35 am The accrued interest and bond premium should be reported on an income tax return as adjustments to interest income, not capital losses. Schedule B should have the following sublines of line 1
  • "Fidelity" as payer with an amount including 163 (sum of the interest payments)
  • "Accrued Interest" as payer with an amount including -76
  • "Bond Premium" as payer with an amount including -9
Line 2 of Schedule B will be the sum of those for a net of $78 for that Treasury. After sublines for all the interest payers but before the sublines for the adjustments, there should be a "Subtotal" subline with the sum of the amounts from all the interest payers.
Thanks, that's very helpful.

I know I should wait till the actual 1099s come out, but I'm trying to decide whether I should purchase some more 2ndary market Treasuries or wait for auctions right now.

I really don't want to deal with a lot of manual TT adjustments at tax time for each Treasury I buy, so I would otherwise have bought at auction or bought in larger quantities (say 30K instead of 10K) to reduce my work). But if Fidelity indeed aggregates, that'll reduce my work (especially if it gets downloaded into TT automatically).

ADDED: So my question is resolved, for now at least.
Last edited by SlowMovingInvestor on Tue Jan 17, 2023 2:58 pm, edited 1 time in total.
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

To the posters whose threads were merged into this thread: please read the OP and the links that are relevant to your questions. If still not answered, try a search within the thread for the topic of interest; e.g., "accrued interest". If none of that answers your questions, please reply with any remaining questions.

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Re: Taxation of Treasury bills, notes and bonds

Post by AAA »

Blues wrote: Fri Nov 18, 2022 10:51 am Well, I hope FreeTaxUSA is capable of handling these scenarios or I'm going to lament having gone down this route...(and probably change back to TurboTax which I gave up using several years ago). All of my purchases, (bills and notes), have been on the secondary market.

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Re: Taxation of Treasury bills, notes and bonds

Post by Blues »

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Re: Taxation of Treasury bills, notes and bonds

Post by AAA »

This is a lot to absorb for the uninitiated and my questions no doubt have already been covered but it's quite confusing so maybe it will help others also.

I have purchased only Treasury Notes at discount last year (2022). Some matured during 2022. I understand that the purchase price included some prorated interest that was due to the seller at the time of purchase.

o Does the 1099-INT Box 1 interest reported by the brokerage (Vanguard, Fidelity) already take the interest paid to the seller into account or do I subtract it out before entering the amount in the tax program?

o Since the redemption price is > the purchase price, will I also receive a 1099-B? My understanding is that the gain is considered part of the interest earned so I don't think I will get one, but if I do how do I handle it in the tax program if it's not a capital gain?

o I'll be using H&R Block's downloaded program. From your experience, will its interview questions take all this into account for me without my having to do any calculations?
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

AAA wrote: Wed Jan 18, 2023 10:55 am This is a lot to absorb for the uninitiated and my questions no doubt have already been covered but it's quite confusing so maybe it will help others also.

I have purchased only Treasury Notes at discount last year (2022). Some matured during 2022. I understand that the purchase price included some prorated interest that was due to the seller at the time of purchase.

o Does the 1099-INT Box 1 interest reported by the brokerage (Vanguard, Fidelity) already take the interest paid to the seller into account or do I subtract it out before entering the amount in the tax program?
Tax software lets you make an adjustment for accrued interest. It is reported by the broker in the year of purchase in a supplemental section of the composite 1099. You make the adjustment in the year of the first coupon payment, so don't forget about the accrued interest if the first coupon payment is not in the year of purchase.
o Since the redemption price is > the purchase price, will I also receive a 1099-B? My understanding is that the gain is considered part of the interest earned so I don't think I will get one, but if I do how do I handle it in the tax program if it's not a capital gain?
This is explained in the OP:
Accrued market discount is reported by the broker as an adjustment to capital gains in box 1f of 1099-B for the year in which the security is disposed of (sold or matures). This accrued market discount is entered as interest by the tax preparer on Schedule B. There is some debate as to whether accrued market discount is exempt from state and local income tax. It may vary by state.
o I'll be using H&R Block's downloaded program. From your experience, will its interview questions take all this into account for me without my having to do any calculations?
If you search the thread for the topic of interest, e.g., "accrued market discount", I think you'll find your answers. If you sell before maturity, you'll have to do a calculation to figure out what is accrued market discount (taxed as interest) and what is cap gain.

Kevin
If I make a calculation error, #Cruncher probably will let me know.
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Re: Tax implication of coupon vs gain through treasury bonds

Post by sherwood88 »

Another follow up questions:

Say, my form shows $125 on accrued interest paid on PURCHASES but only received for calendar year 2022 $101 on 10/1/2022.

My tax form shows I received $101 on front 1099-INT.

Two questions:
1. I think, I can deduct $125 from $101? So I don't have to pay tax on $101 (?) and can I carry over $24 for next year or able to deduct from other interest income that I have from other sources.

2. Do I need to calculate accrual part of income that I have NOT received (from 10/1/22-12/31/22). i.e. Income earned but not received in cash.

thanks
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Re: Tax implication of coupon vs gain through treasury bonds

Post by Kevin M »

I suggest you post your questions in this thread: Taxation of Treasury bills, notes and bonds - Bogleheads.org.

Your questions may already be answered there. If not, post it there. We could even ask a moderator to merge this thread into that thread if you'd like.

Kevin
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Re: Tax implication of coupon vs gain through treasury bonds

Post by sherwood88 »

Thanks Kevin.

Moderator - Feel free to merge this thread with above. Thanks
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Re: Taxation of Treasury bills, notes and bonds

Post by Misenplace »

^This A portion of sherwood's thread has been merged into the ongoing master thread.
Thank you to the member who reported the post so that we knew to move it.

Moderator Misenplace

Edit to add: Correction, only the recent portion of this thread was merged into the master thread. Since OP's first post was Oct. 22, merging the entirety of the threads made it the first post in Kevin's master thread, which is not what I think anyone wanted. :oops: I have merged this more recent discussion into the master thread, and left OP's discussion from Oct. in it's own thread in Personal Finance.
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Re: Tax implication of coupon vs gain through treasury bonds

Post by Kevin M »

sherwood88 wrote: Sat Jan 21, 2023 8:30 am Another follow up questions:

Say, my form shows $125 on accrued interest paid on PURCHASES but only received for calendar year 2022 $101 on 10/1/2022.

My tax form shows I received $101 on front 1099-INT.

Two questions:
1. I think, I can deduct $125 from $101? So I don't have to pay tax on $101 (?) and can I carry over $24 for next year or able to deduct from other interest income that I have from other sources.

2. Do I need to calculate accrual part of income that I have NOT received (from 10/1/22-12/31/22). i.e. Income earned but not received in cash.

thanks
1. Here is what IRS pub 550 says:
Accrued interest on bonds.

If you received a Form 1099-INT that reflects accrued interest paid on a bond you bought between interest payment dates, include the full amount shown as interest on the Form 1099-INT on Schedule B (Form 1040), Part I, line 1. Then, below a subtotal of all interest income listed, enter “Accrued Interest” and the amount of accrued interest you paid to the seller. That amount is taxable to the seller, not you. Subtract that amount from the interest income subtotal. Enter the result on line 2b of Form 1040 or 1040-SR.
It doesn't address your question directly, but I think as long as you don't end up with a negative total on Schedule B you will be fine. If you prefer, you could deduct only 101 of it, and deduct the rest in the following tax year.

2. No. You only pay tax on stated interest (i.e., coupon payments) for the tax year received.

You can search this thread for "accrued interest" to see discussions we've already had about it.

Kevin
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

Misenplace wrote: Sat Jan 21, 2023 4:13 pm Edit to add: Correction, only the recent portion of this thread was merged into the master thread. Since OP's first post was Oct. 22, merging the entirety of the threads made it the first post in Kevin's master thread, which is not what I think anyone wanted. :oops: I have merged this more recent discussion into the master thread, and left OP's discussion from Oct. in it's own thread in Personal Finance.
Perfect! Thanks.
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Re: Tax implication of coupon vs gain through treasury bonds

Post by sherwood88 »

Kevin M wrote: Sat Jan 21, 2023 5:08 pm
sherwood88 wrote: Sat Jan 21, 2023 8:30 am Another follow up questions:

Say, my form shows $125 on accrued interest paid on PURCHASES but only received for calendar year 2022 $101 on 10/1/2022.

My tax form shows I received $101 on front 1099-INT.

Two questions:
1. I think, I can deduct $125 from $101? So I don't have to pay tax on $101 (?) and can I carry over $24 for next year or able to deduct from other interest income that I have from other sources.

2. Do I need to calculate accrual part of income that I have NOT received (from 10/1/22-12/31/22). i.e. Income earned but not received in cash.

thanks
1. Here is what IRS pub 550 says:
Accrued interest on bonds.

If you received a Form 1099-INT that reflects accrued interest paid on a bond you bought between interest payment dates, include the full amount shown as interest on the Form 1099-INT on Schedule B (Form 1040), Part I, line 1. Then, below a subtotal of all interest income listed, enter “Accrued Interest” and the amount of accrued interest you paid to the seller. That amount is taxable to the seller, not you. Subtract that amount from the interest income subtotal. Enter the result on line 2b of Form 1040 or 1040-SR.
It doesn't address your question directly, but I think as long as you don't end up with a negative total on Schedule B you will be fine. If you prefer, you could deduct only 101 of it, and deduct the rest in the following tax year.

2. No. You only pay tax on stated interest (i.e., coupon payments) for the tax year received.

You can search this thread for "accrued interest" to see discussions we've already had about it.

Kevin
Thanks Kevin. This is very helpful thread and wish I knew lot of stuff that was discussed.

Just to follow up for clarity for me and others...
I have paid $125 (accrued int paid) but only received $101 is because only 1 out of 2 bond coupon was received before the year end as other coupon will come in following years.

Does that mean, I should only deduct a accrued int paid from a bond and align coupon received. Pay tax for 2022 on $101-$75 = $26 and pay tax on 2023 $60-$50 = $10?

i.e. Bond A: $75 accrued int paid and received $101 in 2022
Bond B: $50 accrued int paid and received $0 in 2022 and will come $60 in Feb 2023

thanks
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Re: Tax implication of coupon vs gain through treasury bonds

Post by Kevin M »

sherwood88 wrote: Sat Jan 21, 2023 5:27 pm
Kevin M wrote: Sat Jan 21, 2023 5:08 pm
sherwood88 wrote: Sat Jan 21, 2023 8:30 am Another follow up questions:

Say, my form shows $125 on accrued interest paid on PURCHASES but only received for calendar year 2022 $101 on 10/1/2022.

My tax form shows I received $101 on front 1099-INT.

Two questions:
1. I think, I can deduct $125 from $101? So I don't have to pay tax on $101 (?) and can I carry over $24 for next year or able to deduct from other interest income that I have from other sources.

2. Do I need to calculate accrual part of income that I have NOT received (from 10/1/22-12/31/22). i.e. Income earned but not received in cash.

thanks
1. Here is what IRS pub 550 says:
Accrued interest on bonds.

If you received a Form 1099-INT that reflects accrued interest paid on a bond you bought between interest payment dates, include the full amount shown as interest on the Form 1099-INT on Schedule B (Form 1040), Part I, line 1. Then, below a subtotal of all interest income listed, enter “Accrued Interest” and the amount of accrued interest you paid to the seller. That amount is taxable to the seller, not you. Subtract that amount from the interest income subtotal. Enter the result on line 2b of Form 1040 or 1040-SR.
It doesn't address your question directly, but I think as long as you don't end up with a negative total on Schedule B you will be fine. If you prefer, you could deduct only 101 of it, and deduct the rest in the following tax year.

2. No. You only pay tax on stated interest (i.e., coupon payments) for the tax year received.

You can search this thread for "accrued interest" to see discussions we've already had about it.

Kevin
Thanks Kevin. This is very helpful thread and wish I knew lot of stuff that was discussed.

Just to follow up for clarity for me and others...
I have paid $125 (accrued int paid) but only received $101 is because only 1 out of 2 bond coupon was received before the year end as other coupon will come in following years.

Does that mean, I should only deduct a accrued int paid from a bond and align coupon received. Pay tax for 2022 on $101-$75 = $26 and pay tax on 2023 $60-$50 = $10?

i.e. Bond A: $75 accrued int paid and received $101 in 2022
Bond B: $50 accrued int paid and received $0 in 2022 and will come $60 in Feb 2023

thanks
As I recall, you're supposed to deduct the accrued interest for a bond in the year of the first coupon payment. Based on that, what you suggest is correct. However, I don't think there will be any problem if you deduct all the accrued interest as long as you have enough interest income to offset it.

I used a CPA one year to do my taxes, and he deducted all accrued interest paid in the year, even though some of the bonds didn't pay interest that year. However, the CPA made tons of mistakes that I had to correct, so I wouldn't assume this was actually correct.

Subsequently, in doing my own tax returns, I deducted only the accrued interest for bonds that paid interest in the year of purchase, and deducted the rest the following year.

Kevin
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US Treasuries - Fed income tax options

Post by Goldilocks »

[Thread merged into here --admin LadyGeek]

Can we legitimately reduce federal income tax on earnings from individually owned US treasuries by buying a 52 Week Note or something similar and claiming the return as a long term capital gain on an asset held for one year instead of claiming the earnings as interest taxed at ordinary income rates?
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Re: US Treasuries - Fed income tax options

Post by cat_guy »

I'm curious about this too, and it's surprisingly difficult to google for.

I know a regular 1-year note will pay interest every 6 months.

A zero-coupon pays at maturity, but annual tax is not invisible to IRS. https://www.finra.org/investors/insight ... upon-bonds
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Re: US Treasuries - Fed income tax options

Post by Call_Me_Op »

Goldilocks wrote: Thu Jan 26, 2023 8:01 am Can we legitimately reduce federal income tax on earnings from individually owned US treasuries by buying a 52 Week Note or something similar and claiming the return as a long term capital gain on an asset held for one year instead of claiming the earnings as interest taxed at ordinary income rates?
No.
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Re: US Treasuries - Fed income tax options

Post by JayB »

Goldilocks wrote: Thu Jan 26, 2023 8:01 am Can we legitimately reduce federal income tax on earnings from individually owned US treasuries by buying a 52 Week Note or something similar and claiming the return as a long term capital gain on an asset held for one year instead of claiming the earnings as interest taxed at ordinary income rates?
You cannot do that, but you can buy a 52-week T Bill now that will mature in January 2024 and owe no taxes on the interest until the 2024 tax year. This can be a good way to defer interest income into the next tax year.
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Re: Taxation of Treasury bills, notes and bonds

Post by LadyGeek »

I merged Goldilocks' thread into the ongoing discussion. The combined thread is in the Investing - Theory, News & General forum (general discussion).

(Thanks to the member who reported the post and provided a link to this thread.)
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Re: Taxation of Treasury bills, notes and bonds

Post by AAA »

Kevin M wrote: Wed Jan 18, 2023 12:11 pm Tax software lets you make an adjustment for accrued interest. It is reported by the broker in the year of purchase in a supplemental section of the composite 1099. You make the adjustment in the year of the first coupon payment, so don't forget about the accrued interest if the first coupon payment is not in the year of purchase.
Kevin
So glad you wrote this as I just encountered the situation while working on my taxes. I had some Treasuries at one brokerage, with amounts for 1099-INT and accrued interest. I see where the latter shows up on Schedule B and is subtracted from the reported interest.

Treasuries at another brokerage hadn't yet made their first payment, so 1099-INT amount is 0, which is what I entered. When I entered the accrued interest amount it did not show up in Schedule B even though there was other interest it could have reduced. So as you said I will have to use it on next year's taxes.

Just curious - as I entered the unused accrued interest amount in the H&R Block program and it is not used for the 2022 return, is the program smart enough to know to use it next year when interest is reported from this brokerage (which I will make a note to check) or - more likely - should I just remove it and make a note to use it next year?
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Re: Taxation of Treasury bills, notes and bonds

Post by Kevin M »

AAA wrote: Sun Jan 29, 2023 9:33 am
Kevin M wrote: Wed Jan 18, 2023 12:11 pm Tax software lets you make an adjustment for accrued interest. It is reported by the broker in the year of purchase in a supplemental section of the composite 1099. You make the adjustment in the year of the first coupon payment, so don't forget about the accrued interest if the first coupon payment is not in the year of purchase.
Kevin
So glad you wrote this as I just encountered the situation while working on my taxes. I had some Treasuries at one brokerage, with amounts for 1099-INT and accrued interest. I see where the latter shows up on Schedule B and is subtracted from the reported interest.

Treasuries at another brokerage hadn't yet made their first payment, so 1099-INT amount is 0, which is what I entered. When I entered the accrued interest amount it did not show up in Schedule B even though there was other interest it could have reduced. So as you said I will have to use it on next year's taxes.

Just curious - as I entered the unused accrued interest amount in the H&R Block program and it is not used for the 2022 return, is the program smart enough to know to use it next year when interest is reported from this brokerage (which I will make a note to check) or - more likely - should I just remove it and make a note to use it next year?
Interesting. I would remove it, since no interest was reported on 1099-INT.
If I make a calculation error, #Cruncher probably will let me know.
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Re: Taxation of Treasury bills, notes and bonds

Post by AAA »

Kevin M wrote: Sun Jan 29, 2023 11:10 am Interesting. I would remove it, since no interest was reported on 1099-INT.
It's just curious to me that there was interest from the other brokerage that the program could have used the accrued interest to reduce but it didn't. Amounts from all sources are added together in Schedule B. Is there a rule about using the accrued interest from one source to offset the interest from another source?
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Re: Taxation of Treasury bills, notes and bonds

Post by investingisart »

It seems like buying on secondary marking does not complicate taxation as long as the T-Bills are held to maturity

I am curious why should we buy T-Bills during auction (instead of buying from secondary market)? It seems like the settlement date is auction date plus 2 days. So by buying in secondary market, we could avoid the wait of about 3 days and not have the money idle?
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