Tax rate on bond coupon

You may offset an unlimited amount of such losses dollar-for-dollar against capital gains you have realized on other investments bonds, stocks, mutual funds, real estate, etc. These rules apply to the sale of shares in bond funds as well as to individual bonds. When bonds are issued at substantially less than par face value, the difference between the face amount and the initial offering price is known as original-issue discount.

Zero-coupon bonds are the best-known variety of this category of bonds. The tax treatment of original-issue-discount bonds is particularly complicated, so if you plan to invest in them, it is essential to consult your tax attorney or adviser.


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During the time you own original-issue-discount bonds, you will pay tax each year on a portion of the discount even though you do not receive it in cash. However, if you hold them to maturity, you do not pay capital gains or other taxes on the amount by which the face value you receive exceeds the discounted amount you paid for the bonds. The reason is that you paid taxes on that excess incrementally each year that you held the bonds. All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable.

How to Save Income Tax on Capital Gains by Bonds Investment : Income Tax News 57

By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. However, there is often more than meets the eye on these forms than the income that is generated from the stated rate of interest. Many fixed income investors are unaware of a number of factors that can impact the amount of taxable interest that they must report at the end of the year.

This article will explore each of the major categories of bonds , as well as analyze some of the other issues that factor into what investors must report as income.

Good news: A bit of strategy can help you avoid paying taxes on bond interest.

The following is a breakdown of each type of debt. The interest from Treasury bills , notes and bonds as well as U. Despite the fact that they have no stated coupon rate, zero-coupon investors must report a prorated portion of interest each year as income, even though it has not been paid out. Zeros are issued at a discount and mature at par value , and the amount of the spread is divided equally among the number of years to maturity and taxed as interest, just as any other original issue discount bond.

Savings Bonds Savings bonds are often a safe investment vehicle with many added benefits. Series E and EE savings bonds are also state and local tax free, except that the interest on them may be deferred until maturity.


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  5. Series H and HH bonds pay taxable interest semiannually until maturity. The interest from Series E and I bonds may also be excluded from income if the proceeds are used to pay higher education expenses. Municipal bonds are generally appropriate for high-income investors who are seeking to reduce their taxable investment income. The interest from these bonds is tax free at the federal, state and local levels as long as the investor resides in the same state or municipality as the issuer.

    Zero Coupon Municipal Bonds: Tax Treatment

    Municipal bonds pay a commensurately lower rate than other bonds as a result of their tax-free status. If you want to accurately compare the return, you will receive from a municipal bond versus a taxable bond , you must compute its taxable equivalent yield.


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    The formula is as follows:. Example — Taxable Equivalent Yield Joe is trying to decide whether he should invest in a corporate or municipal issue.

    Tax Treatment of Bonds and How It Differs From Stocks

    Which is the best choice? This is true for most investors in the lower tax brackets. Corporate bonds are the simplest type of bond from a tax perspective, as they are fully taxable at all levels. Regardless of the type of bonds that are sold, any debt issue that is traded in the secondary market will post either a capital gain or loss, depending on the price at which the bonds were bought and sold. This includes government and municipal issues as well as corporate debt. Gains and losses on bond transactions are reported the same as with any other type of security, such as stocks or mutual funds, for the purposes of capital gains.