Individual investors are sometimes confused about whether they own a stock or a bond. A bond or note always has a maturity date and an interest coupon % rate associated with it. If you see a due date and an interest percent, you own a note or bond.
The term "bond" refers to longer maturity dates (over ten years), while the term "note" refers to intermediate maturity dates (one to ten years.)
These are also called fixed-income investments or fixed-income securities because the amount of annual cash interest you will receive is fixed by the coupon rate of interest. The par value is the face amount of the bond or note, meaning the amount of principal that will be paid back to the investor on the maturity date. The par value of a bond is typically a round number ending in three zeroes.
Click on the image below to access our handy tool to calculate the cost basis of your bond.
Amortization Table Generator
There are three things you need to know about your bond to determine the proper approach and method of calculation of the cost basis:
(1) The first thing you need to find out is whether your bond is classified as taxable or tax-exempt. You can usually tell from the name of the bond whether it is a taxable or tax-exempt entity that issued the bond. If the name of the issuer is a state or local governmental body or taxing authority, it is generally tax-exempt. There are a few exceptions where a bond with a governmental sounding name is in fact taxable, but these are rare. If the name of the issuer includes the word "Federal" or "U.S." or the name of a for-profit corporation, it is generally taxable for Federal income tax purposes.
(2) The second thing you need to know is whether you bought the bond exactly at par value, at a premium over par value, or at a discount below par value.
(3) The third piece of information is whether you held the bond until redemption at maturity or sold it (or it was called by the issuer) prior to maturity.
Thus, for the three questions, there are twelve possible combinations to address. Let's start with the three possible purchase price scenarios:
If you bought it at a Premium over par value (more than $100.00), go HERE> PREMIUM
If you bought it at a Discount from par value (less than $100.00), go HERE> DISCOUNT
Assumptions for all answers:
• You did not elect to amortize (write off) premiums on taxable bonds (which is way too complicated for individual investors, anyway.) • Adjustments for state individual income taxes are not addressed. • You bought the bond after 1993 (the rules changed then.) • These instructions apply to either bonds or notes in the same manner.
FINAL WORDS
Be sure to tell your Congressperson that they need to simplify the tax code. It is ridiculous to expect the average taxpayer to follow these rules.
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Information provided is intended solely for U.S. individual cash-basis taxpayers and is believed to be accurate for most cases. Always consult your personal tax advisor about your own situation. Suggestions are most welcome. Please e-mail webmaster @ costbasis.com or write to us at P O Box 11022, Chicago IL 60611 with your comments.
