Amortizing Bond Premium Using the Effective Interest Rate Method

A business bad debt, generally, is one that comes from operating your trade or business and is deductible as a business loss. All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses. You report this type of ordinary loss on Form 4797, Part II, line 10. In addition to the information required by the form, you must include the name and address of the company that issued the stock.

Generally, you treat your gain or loss from the sale, exchange, or redemption of an OID debt instrument as a capital gain or loss if you held the debt instrument as a capital asset. If you sold the debt instrument through a broker, you should receive Form 1099-B or an equivalent statement from the broker. Use the Form 1099-B or other statement and your brokerage statements to complete Form 8949, and Schedule D (Form 1040). Acquisition premium is the excess of a debt instrument’s adjusted basis immediately after purchase, including purchase at original issue, over the debt instrument’s adjusted issue price at that time.

Table 4-4. What Is Your Maximum Capital Gain Rate?

They are paid out of earnings and profits and are ordinary income to you. You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive.

In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. Also, you may be allowed to add to the donor’s adjusted basis all or part of any gift tax paid, depending on the date of the gift. The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions). Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. This affects whether your capital loss is long term or short term. However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale.

Publication 550 – Additional Material

However, you must increase the sales price from $34 to $39 (to account for the $5 portion of the loss that is not deductible). Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. After that, it is your basis decreased by the amount of bond premium amortized for earlier periods, and the amount of any payment previously made on the bond other than a payment of qualified stated interest. A REMIC regular interest is treated as a debt instrument for income tax purposes.

Any amount you receive on the retirement of a debt instrument is treated in the same way as if you had sold or traded that instrument. If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). You cannot deduct the loss that was not allowed to your brother. You cannot deduct your loss on the sale of stock through your broker if, under a prearranged plan, a related party buys the same stock you had owned. This does not apply to a trade between related parties through an exchange that is purely coincidental and is not prearranged.

Premium Amortization

The eligible gain minus your section 1202 exclusion is a 28% rate gain. To find the amount of interest and carrying charges that is not deductible and that must be added to the annual account net gain or loss, apply the rules described earlier to the positions held in the mixed straddle account. See Interest expense and carrying https://www.bookstime.com/ charges on straddles in chapter 3. The net amounts keep their long-term or short-term classification. However, no more than 50% of the total annual account net gain for the tax year can be treated as long-term capital gain. Also, no more than 40% of the total annual account net loss can be treated as short-term capital loss.

Generally, a private activity bond is part of a state or local government bond issue that meets both the following requirements. Original issue discount (OID) on tax-exempt state or local government bonds is treated as tax-exempt interest. Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. A qualified U.S. savings bond is a Series EE bond issued after 1989 or a Series I bond. The bond must be issued either in your name (sole owner) or in your and your spouse’s names (co-owners). You must be at least 24 years old before the bond’s issue date.

This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Form 1099-DIV, box 12, shows exempt-interest bond premium amortization schedule dividends from a mutual fund or other regulated investment company paid to you during the calendar year. See the Instructions for Form 1040 or 1040-SR for where to report.

In some situations, part of your gain or loss may be a capital gain or loss, and part may be an ordinary gain or loss. If, in an otherwise nontaxable trade of property for corporate stock, you also receive money or property other than stock, you may have a taxable gain. However, you are taxed only up to the amount of money plus the fair market value of the other property you receive. The rules for figuring taxable gain in this situation generally follow those for a partly nontaxable exchange discussed earlier under Like-Kind Exchanges.