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Posted by Dan Lanciani on January 17, 2008, 4:31 am
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I had a muni bond which went into default about a year ago.
Subsequently it sat in my account priced at about 1% of face value.
I placed a market sale order and it did indeed sell, again for about
1% of face value. Do I need to do anything special because it was
tax exempt and/or because it defaulted or can I compute the capital
loss in the usual way, making the normal adjustments to basis? Did
OID stop accruing when the bond went into default?
Dan Lanciani
ddl@danlan.*com
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Posted by Bill on January 17, 2008, 10:35 am
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ddl@danlan.*com (Dan Lanciani) posted:
>I had a muni bond which went into default
>about a year ago. Subsequently it sat in my
>account priced at about 1% of face value. I
>placed a market sale order and it did indeed
>sell, again for about 1% of face value. Do I
>need to do anything special because it was
>tax exempt and/or because it defaulted or can
>I compute the capital loss in the usual way,
>making the normal adjustments to basis? Did
>OID stop accruing when the bond went into
>default?
I was completely with you, and ready to tell you that you should proceed
exactly as you suggested -- that is, "in the usual way" -- until you
raised the OID question? Are you suggesting that this particular muni
bond did not pay "tax-free interest" -- but rather, was a "zero-coupon
bond"?
If you're not suggesting that, then my initial impulse stands. If you
somehow bought a "zero-coupon" muni bond, then there's a whole new world
of complexity. Have you been "accruing" imputed-interest? How?
I hope that OID statement was some kind of wild hair, because if so, you
simply enter your original purchase date and then the sale date, show
the proceeds, and then enter your original cost + any commissions to
establish a total cost basis, and the difference should become a
long-term capital loss, all in the "usual way."
Bill
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Posted by Dan Lanciani on January 17, 2008, 3:38 pm
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an_ordinary_guy_158@hotmail.com (Bill) writes:
|
| ddl@danlan.*com (Dan Lanciani) posted:
|
| >I had a muni bond which went into default
| >about a year ago. Subsequently it sat in my
| >account priced at about 1% of face value. I
| >placed a market sale order and it did indeed
| >sell, again for about 1% of face value. Do I
| >need to do anything special because it was
| >tax exempt and/or because it defaulted or can
| >I compute the capital loss in the usual way,
| >making the normal adjustments to basis? Did
| >OID stop accruing when the bond went into
| >default?
|
| I was completely with you, and ready to tell you that you should proceed
| exactly as you suggested -- that is, "in the usual way" -- until you
| raised the OID question? Are you suggesting that this particular muni
| bond did not pay "tax-free interest" -- but rather, was a "zero-coupon
| bond"?
No, it was not a zero-coupon bond but its issue price was (as is often
the case) slightly under par. Typically OID on a muni is treated as
tax-exempt interest. It accrues over the life of the bond, increasing
its basis. It occurs to me that once the bond is in default it may well
no longer satisfy the requirements of a tax-exempt instrument so perhaps
I had *taxable* OID interest between the default and the sale. Of course,
these are really small numbers we are talking about and they don't matter
much. My main concern was that there might be some loss limitation gotcha
on munis that I wasn't aware of.
Dan Lanciani
ddl@danlan.*com
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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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Posted by Seth on January 17, 2008, 4:21 pm
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>No, it was not a zero-coupon bond but its issue price was (as is often
>the case) slightly under par.
How slightly? IIRC, there's no OID income if it's slight enough, only
when the bond is intentionally issued with a below-par coupon and
accretion.
> Typically OID on a muni is treated as
>tax-exempt interest. It accrues over the life of the bond, increasing
>its basis. It occurs to me that once the bond is in default it may well
>no longer satisfy the requirements of a tax-exempt instrument
Why not? It was still issued by a municipality, right?
> so perhaps
>I had *taxable* OID interest between the default and the sale.
If it was in default, there's no income, OID, coupon or accrual.
Seth
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<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
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<< to this newsgroup as well as our anti-spamming policy >>
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Posted by Dan Lanciani on January 17, 2008, 11:13 pm
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|
| >No, it was not a zero-coupon bond but its issue price was (as is often
| >the case) slightly under par.
|
| How slightly?
Looks like it issued at around 96.4.
| IIRC, there's no OID income if it's slight enough, only
| when the bond is intentionally issued with a below-par coupon and
| accretion.
For taxable bonds minimal OID may (must?) be disregarded in the sense
that it merely adds to the gain (reduces the loss) at redemption. This
is of course good for the owner since it converts interest into capital
gain taxed at a lower rate. For tax exempt bonds disregarding the OID
would convert what was allegedly tax exempt interest into taxable capital
gain. Last time I checked this was not required (though I'm sure the IRS
wouldn't object to your paying extra taxes :). A change to that effect
may well have occurred--it certainly wouldn't be out of character with
the perpetual tweaks to muni accounting. (In the good old days you could
recognize all the OID even if the bond was called prior to maturity. Now
you have to accrue.)
This all raises the fascinating question of whether you could disregard
OID on a muni that was originally tax exempt but became taxable through
some violation of the rules.
| >It occurs to me that once the bond is in default it may well
| >no longer satisfy the requirements of a tax-exempt instrument
|
| Why not? It was still issued by a municipality, right?
Sure, but isn't there a lot more to it that that? Every time I purchase
a muni at issue I get a complicated prospectus with opinions as to the
(non) taxability of the interest, and they always make a big deal about
the importance of continues compliance with various rules. I can imagine
that an entity in enough trouble that they are going to default on payment
might forget to cross all the t's and dot all the i's.
Dan Lanciani
ddl@danlan.*com
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<< ------------------------------------------------------- >>
<< The foregoing was not intended or written to be used, >>
<< nor can it used, for the purpose of avoiding penalties >>
<< that may be imposed upon the taxpayer. >>
<< >>
<< The Charter and the Guidelines for submitting posts >>
<< to this newsgroup as well as our anti-spamming policy >>
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