Redemption - government bond - vs. sale before maturity

Technical topics regarding tax preparation.
#1
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taxpayer purchases a taxable bond with a maturity 13 months from the date of purchase. taxpayer can hold to redemption date, or taxpayer can sell after the 12 months' date at a gain.

this one shouldn't be hard, but struggling to find a clear answer - would the gain be treated as LTCG, or is there some rule that would treat the gain as interest income?
 

#2
Nilodop  
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If there was no OID, a redemption vs a sale should make no difference. The "gain" was due to market discount upon purchase. But accrued interest at purchase and sale dates also must be accounted for.
Last edited by Nilodop on 20-May-2022 4:00pm, edited 1 time in total.
 

#3
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this would be the "gain" between (coupon) interest payment dates
 

#4
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On sale the accrued but unpaid interest would be taxable as interest and the balance would be a capital transaction.
Steve
 

#5
Nilodop  
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For clarity (I hope), pretend:

Face amount of bond 100,000, issued years ago at face
Interest of 1,200 payable 1/1 and 7/1 (2,400 per year)
Purchase date 4/1/20
Purchase price 98,600, including 600 accrued interest and 2,000 market discount
Sale or redemption date 2/1/22
" " " price 100,200, including 200 accrued interest

2020 income:
Interest 1,800 (2400 received minus 600 accrued, paid in purchase price)

2021 income:
2,400 interest

2022 income:
LTCG 2,000 (Sale/redemption 100,000 minus 98,000 basis), and interest 200 received as accrued at sale/redemption
 

#6
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Simpler than that - assume $100k purchase price (no market discount), and sold before maturity for $101k (assume the extra $1k relates to accrued interest payable at the next interest payment date). Is the seller of the bond required to treat the $1k of “gain” as interest income?
 

#7
Nilodop  
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Yes. In your facts, it's the only reason he got the "gain".
 

#8
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No disagreement there - I haven’t found a specific cite or reference for the treatment to the seller (besides the schedule B instructions that don’t make mention of character to the seller)- are you aware of any?
 

#9
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Scrap that, now found - thanks for the sanity check
 

#10
Nilodop  
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Curious, what did you find?
 

#11
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26 CFR § 1.61-7 - Interest.… (d)
 


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