SALE OF MUNICIPAL BONDS - handling

[TAXNJ]

Anyone know where in The TAXBOOK (page #) the sale of municipal bonds is discussed?

I have looked on The Tax Portal and it was referenced only in the Gift Tab and also looked in The TAXBOOK Index and no reference!

I believe from a Federal point the gain/loss is not a taxable event?

Just trying to get a reference for federal treatment

thanks in advance

[Lion]

Form 8949/Schedule D.

Are you thinking about the INTEREST from municipal bonds being subtracted out on Schedule B?

[Maribeth]

The sale of a municipal bond is handled just like any other sale of an investment. Gain or loss is a capital gain/loss. Only the income from the bond is tax-free.

[TAXNJ]

Do you have a reference

Do you have a reference for the gain/loss treatment?

[DonB]

Agree with Maribeth

Do you have a reference for the gain/loss treatment?

All income is taxable unless the tax code states it is not taxable. Therefore there would not be a reference specific to municipal bonds saying there is no gain or loss on sale.

[TAXNJ]

Pub 17

Thanks to both of you. Defaulted to publication 17. Was hoping to reference The TAXBOOK.

Yes the the gain/loss requires federal treatment versus the particulate state where bonds issued

[BOB W]

Don't forget, the tax free earnings over the years gets added to basis when figuring gain or loss.

[Lion]

What state issued the bonds? Why do you think the gain/loss won't transfer to the state return? Is your client a resident of a state that starts with federal AGI?

[TAXNJ]

NJ - reason see state code

To answer your questions:

NJ - reason further see state code for your last two questions and get back to me

NJ REFERENCE: Bulletin GIT-5

Thanks for your comments

What state issued the bonds? Why do you think the gain/loss won't transfer to the state return? Is your client a resident of a state that starts with federal AGI?

[TAXNJ]

Yes thanks

Yes thanks Bob

Don't forget, the tax free earnings over the years gets added to basis when figuring gain or loss.

[FEDUKE404]

Basis increase on munis

Don't forget, the tax free earnings over the years gets added to basis when figuring gain or loss.

Never heard that one before. Did I sleep through tax class?

(Perhaps with some OID situations, but are you saying plain ole "Your local county" munis have an ever-increasing basis with each regular non-taxable interest payment ? ? ? ? ?

FE

[Gary2]

Never heard that one before. Did I sleep through tax class?

(Perhaps with some OID situations, but are you saying plain ole "Your local county" munis have an ever-increasing basis with each regular non-taxable interest payment ? ? ? ? ?

I would say most OID situations, and conversely, bond premium on munis must also be amortized, reducing the basis with each payment.

But you're correct that if someone buys a $1,000 muni at face value, receiving interest each year, there is no basis adjustment. And the bottom line is that if a muni was bought at original issue and held to maturity (a common situation for unsophisticated muni investors), then regardless of whether it was bought at a discount, premium, or face value, there will be 0 net gains on redemption.

[Roland Slugg]

Don't forget, the tax free earnings over the years gets added to basis when figuring gain or loss.

Hardly!

All that gets added to basis is the OID or market discount, as it accretes over time. (Code §1278(b)(4)) If a market premium is paid for a T/F muni bond, that premium slowly reduces the bond's basis in a similar but opposite manner.

[BOB W]

Tax-exempt bond. If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. In general, use the rules that follow to determine your OID.

http://www.irs.gov/publications/p1212/ar02.html#en_US_201312_publink1000206307

Zero-coupon municipal bonds: Zero-coupon bonds, either taxable or tax-exempt, pay interest at maturity rather than at regular intervals throughout the life of the bond. Generally, zeros are sold at a discount to their face value, with the promise of returning full face value to the investor at maturity. Here is the difference between taxable and tax-exempt zeros: Taxable zero-coupon bonds accrue interest each year and holders must pay tax on it, even though they do not receive the interest until the bond is sold or matures. For tax-exempt issues, there is no federal income tax on the accrued interest.

[FEDUKE404]

Dealing with muni OID interest and basis adjustments

Tax-exempt bond. If you own a tax-exempt bond, figure your basis in the bond by adding to your cost the OID you would have included in income if the bond had been taxable. You need to make this adjustment to determine if you have a gain or loss on a later disposition of the bond. In general, use the rules that follow to determine your OID.

http://www.irs.gov/publications/p121...link1000206307

It should be noted there are many (most?) tax-free munis out there, where there is never a basis adjustment for prior income received such as OID instruments routinely carry.

The calculations of such can become downright painful.....check out the section/examples under "Tax-Exempt Bonds and Coupons" from the above link.....when such an adjustment does become necessary for an OID situation.

FE