Municipal Bond Forum
Capital gain on a discounted bond?
Q
If you buy a discounted bond (not a zero-coupon bond) and it matures at par, is there a capital gain to report?
A
James A. Klotz responds:
If you purchase a bond at a discount, there will be a taxable event at maturity, a portion of which will be taxed at your ordinary income rate.
Selling a discount bond prior to maturity can also have tax ramifications.
If bonds are purchased at Original Issue Discount (OID) or are zero coupon munis, there is no tax at maturity, but once again, may have tax implications if sold prior to maturity, predicated on your cost basis. There will also be a tax to pay if you purchased your zero coupon bonds at a discount to their accreated value.
Please consult your tax professional for advice on your specific situation.
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