Muni bond matured

[AZ-Tax]

Ok, TP purchased bonds before he came my client if that matters. 15 Bonds matured at $1000 per bond and client purchased bond for 100.875 or $1008.75.

Looking to me his cost is: $15131 minus sell price or maturity price of $15000 leave LT loss of $131, everyone in agreement?

[New York Enrolled Agent]

Ok, TP purchased bonds before he came my client if that matters. 15 Bonds matured at $1000 per bond and client purchased bond for 100.875 or $1008.75.

Looking to me his cost is: $15131 minus sell price or maturity price of $15000 leave LT loss of $131, everyone in agreement?

I don't think so. It appears the client bought the muni bond at a premium. If so, the premium must be amortized every year but is not deductible (§171). The amortized premium reduces the basis of the bond each year (§1016(a)(5)). Since the bond has now matured, the basis of each bond may have been reduced to $1,000.

[Snaggletooth]

One-sided Fairness

Any idea why the amortization of premium is not a deduction, but amortization of discount is taxable?

At a minimum, the premium should remain in the basis, and be calculated upon redemption as suggested in the original post. But no -- §171 doesn't allow this.

Of course, in this business, the taxing authorities are under no compunction to be "fair."

[Gary2]

Any idea why the amortization of premium is not a deduction, but amortization of discount is taxable?

Usually it's not.

Remember this is for a tax-exempt bond. OID on a tax-exempt bond is generally not taxable. It's still amortized, which has the effect of wiping out any potential capital gain, just as the amortization of premium wipes out the loss.

There are complications. Market discount is still taxable. For stripped bonds or coupons, part of the OID may be taxable, according to a calculation described in Pub. 1212. I haven't tried to grok it yet, but my intuition suggests that this rule is just to fairly treat some of the OID as really market discount, whereas for taxable bonds, there's less need to fine tune the distinction between market and original discount.

For taxable bonds, amortized premium, if chosen, is a deduction against interest income.