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Amortizing Bond Discount Using the Effective Interest Rate Method

bond premium amortization schedule

On April 2, 2014, you entered into a non-section 1256 position and an offsetting section 1256 contract. You also made a valid election to treat this straddle as an identified mixed straddle. On April 9, 2014, you disposed of the non-section 1256 position at a $600 loss and the section 1256 contract at an $800 gain.

bond premium amortization schedule

For an obligation acquired after October 22, 1986, you also must include the market discount that accrued before the date of sale of the stripped bond (or coupon) to the extent you did not previously include this discount in your income. If you buy a bond between Differences Between For-Profit & Nonprofit Accounting interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond.

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A bond issued after June 30, 1983, generally must be in registered form for the interest to be tax exempt. For information on the retirement, sale, or redemption of U.S. government obligations, see Capital or Ordinary Gain or Loss in chapter 4. Also, see Nontaxable Trades in chapter 4 for information about trading U.S. After you figure this interest exclusion, use a separate Form 4952 to figure your actual deduction for investment interest expenses and attach that form to your return. If the proceeds are more than the expenses, you may be able to exclude only part of the interest.

These penalties are explained in the following paragraphs. If you fail to file Form 8886 as required or fail to include any required information on the form, you may have to pay a penalty. See Penalty for failure to disclose a reportable transaction, later.

Bond Amortization Calculator

Treat gains on short-term federal, state, or local government obligations (other than tax-exempt obligations) as ordinary income up to your ratable share of the acquisition discount. This treatment applies to obligations with a fixed maturity date of not more than 1 year from the date of issue. Acquisition discount is the stated redemption price at maturity minus your basis in the obligation. For noncovered securities, you elect to use the average basis method on your income tax return for the first tax year that the election applies.

bond premium amortization schedule

You recognize a $600 short-term capital gain from the constructive sale and your new holding period in the Baker stock begins on September 9. Any loss on the sale or trade of stock must be treated as a long-term capital loss to the extent you received, from that stock, qualified dividends (defined in chapter 1) that are extraordinary dividends. This is true regardless of how long you actually held the stock. Generally, an extraordinary dividend is a dividend that equals or exceeds 10% (5% in the case of preferred stock) of your adjusted basis in the stock.

The Straight-Line Method

Because OID is listed for each $1,000 of stated redemption price at maturity, you must adjust the listed amount to reflect the debt instrument’s actual stated redemption price at maturity. For example, if the debt instrument’s stated redemption price at maturity is $500, report one-half the listed OID. If the owner’s purchase price cannot be determined, figure the discount as if the owner had purchased the obligation at its original issue price. A special rule is used to determine the original issue price for information reporting on U.S. Under this rule, you treat as the original issue price of the T-bill the noncompetitive (weighted average of accepted auction bids) discount price for the longest-maturity T-bill maturing on the same date as the T-bill being redeemed.

  • This rule will also apply if you entered into a contract or option to acquire the stock or securities within the time period described above.
  • If you buy a stripped coupon, treat as OID any excess of the amount payable on the due date of the coupon over your purchase price.
  • You must include $80 in your income and exclude $20 from your income for the year.
  • Note that taxable bonds don’t have to be amortized, but tax-exempt ones do.
  • In addition, the examiner can also assess penalties based on the facts and circumstances.

You must also notify your broker that you have made the election. Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. Average basis is determined by averaging the basis of all shares of identical stock in an account regardless of how long you have held the stock. However, shares of stock in a DRP are not identical to shares of stock with the same CUSIP number that are not in a DRP.

Publication 1212 – Additional Material

Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. But see Like-Kind Exchanges under Nontaxable Trades, later. You received $6,000 in interest income; $4,800 was tax exempt and $1,200 was taxable. You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses.

  • Your uncle, a cash method taxpayer, died and left you a $1,000 Series EE bond.
  • Your identifying number may be truncated on any paper Form 1099-INT you receive.
  • You figure this part by multiplying the gift tax paid on the gift by a fraction.
  • Generally, add the amount shown in box 3 to any other taxable interest income you received.