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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 Par Value ($100.00), go HERE> PAR VALUE
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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