Calculating cost basis for taxable bonds

[3cat]

My dad and I have a taxable trust account that was formerly with Edward Jones, now with Fidelity. The account includes several bonds that I want to sell as I unwind from the EJ portfolio. (viewtopic.php?p=8018111)

I have questions about cost basis for these bonds. According to IRS Pub 550, cost basis is generally the purchase price plus any transaction fees. I'll provide examples to go with my questions.

Can I use the initial cost + fees for every bond, even if the bond was bought at a premium?

Example: Bond A has par of 10,000. Purchase price in 2018 was $9,967 + $5.00 transaction fee. Edward Jones statements still lists $9,972 as the cost basis. All good.

Example: Bond B has par of 9,000. Purchase price in 2019 was $10,730 + $5.00 transaction fee. The EJ statements shows the cost basis varying over time, I presume due to them using an amortization method for the purchase premium of $1,730.

IRS 550 for 2023 (pg 64) states, "If you buy a bond at a premium, the premium is treated as part of your basis in the bond. If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond." (emphasis added)

However, for taxes, can I simply use the $10,735 as the cost basis? I am not choosing to amortize but perhaps that was chosen in the past by my parents or EJ and was therefore part of their previous income tax reports? How could I determine this.

If I have to use the amortization method, how do I do this accurately? For Bond B, it has a semi-annual coupon of 5.25% and a yield-to-maturity of 3.445%. It was purchased 28 August 2019 and matures 15 December 2032. I would be grateful for a rough example so that I can set up the calculations in a spreadsheet. Edit: figured this out.

Edit: I found all of the old account statements and most of the transaction statements. Finally, the account has bonds that were apparently purchased by a financial advisor prior to 2017, before the EJ account was opened. I don't know if I can find old statements or even what company it was. My dad will not know, as my deceased mom did all the finances. How do I determine cost basis? Can I use the cost basis info from the first Edward Jones statement?

I appreciate the input from everyone for all of my topics related to this process. Thanks,

3cat

[IDpilot]

You should review this thread.

viewtopic.php?t=390405

[FactualFran]

An important question is whether the bonds are covered by IRS regulations that require brokerages to keep track and report the basis to the account holder and also to the IRS when the brokerage issues a 1099-B due to sale, maturity, or other disposition. For covered bonds, use what the brokerage reports as the basis unless you have a strong reason to doubt what the brokerage reports.

With Bond B in the opening post, it is almost certainly a covered bond and the brokerage is calculating the basis as if premium is being amortized each year. The Form 1099-INT from the brokerage each year should have reported how much of the premium had been amortized for the year. For a bond with taxable interest, the premium that was amortized for a year should have reduced the taxable interest income on the tax return for the year.

[3cat]

You should review this thread.

viewtopic.php?t=390405

You're right, I should and have started. I've also figured out to calculate amortization and am getting close to actual numbers. I'm sure my differences are due to partial months/years. I searched bogleheads a few ways but never came across that topic. Thank you.

3cat

[3cat]

An important question is whether the bonds are covered by IRS regulations that require brokerages to keep track and report the basis to the account holder and also to the IRS when the brokerage issues a 1099-B due to sale, maturity, or other disposition. For covered bonds, use what the brokerage reports as the basis unless you have a strong reason to doubt what the brokerage reports.

With Bond B in the opening post, it is almost certainly a covered bond and the brokerage is calculating the basis as if premium is being amortized each year. The Form 1099-INT from the brokerage each year should have reported how much of the premium had been amortized for the year. For a bond with taxable interest, the premium that was amortized for a year should have reduced the taxable interest income on the tax return for the year.

Apparently some bonds are covered and others non-covered. However, the one 1099-B that I have ready access to at the moment is applying the same amortization method to both forms.

If the amortization results of non-covered bonds are not reported to the IRS, then is it legit (read: legal) to use the initial cost + fee as the cost basis or must I still use the amortization process? This is a curiosity question as once I set up amortization for one bond, I can easily set it up for all. Thanks,

3cat

[FactualFran]

If the amortization results of non-covered bonds are not reported to the IRS, then is it legit (read: legal) to use the initial cost + fee as the cost basis or must I still use the amortization process? This is a curiosity question as once I set up amortization for one bond, I can easily set it up for all. Thanks,

With a non-covered taxable bond, if the premium paid has not been amortized each year, then the premium remains in the basis and affects the capital gain calculated when the bond is sold or matures.

[grabiner]

If the amortization results of non-covered bonds are not reported to the IRS, then is it legit (read: legal) to use the initial cost + fee as the cost basis or must I still use the amortization process? This is a curiosity question as once I set up amortization for one bond, I can easily set it up for all. Thanks,

With a non-covered taxable bond, if the premium paid has not been amortized each year, then the premium remains in the basis and affects the capital gain calculated when the bond is sold or matures.

Similarly with a discount (unless the discount meets a de minimis exception). If a bond has a par value of $1000 and you buy it for $900 and hold it to maturity, the whole return is interest; you can't turn $100 of it into capital gain. If you don't amortize the discount, then the $100 gain in price is taxed as interest when you sell the bond.

And for a tax-exempt bond, you must amortize the premium. If a tax-exempt bond has a par value of $1000 and you buy it for $1100, you cannot earn tax-exempt interest and still use a $100 capital loss at maturity. For a taxable bond, you are not required to amortize the premium, although you would normally want to do this in order to postpone tax until later.

Reference:IRS Publication 550, Investment Income and Expenses

[3cat]

Similarly with a discount (unless the discount meets a de minimis exception). If a bond has a par value of $1000 and you buy it for $900 and hold it to maturity, the whole return is interest; you can't turn $100 of it into capital gain. If you don't amortize the discount, then the $100 gain in price is taxed as interest when you sell the bond.

I have two de minimum bonds. They both mature in a bit more than a year and pay decent interest so I will hold them to maturity.

And for a tax-exempt bond, you must amortize the premium. If a tax-exempt bond has a par value of $1000 and you buy it for $1100, you cannot earn tax-exempt interest and still use a $100 capital loss at maturity. For a taxable bond, you are not required to amortize the premium, although you would normally want to do this in order to postpone tax until later.

Reference:IRS Publication 550, Investment Income and Expenses

I don’t have any tax-exempt bonds. All are taxable corporates. Based on all of the monthly account statements and 1099 statements, the premiums were amortized.

Yesterday, I found the remaining statements and most of the transaction statements so I was able to calculate cost basis for all but two bonds. For those two bonds, I was able to determine original purchase price from the account statements. I used a spreadsheet to estimate the yield-to-maturity and tweak the numbers until I came within a few dollars of the values on selected statements spanning up to 2021 (the last statements I can access right now).

Thanks,

3cat

[rossington]

OP, you should hold to maturity and basis will not be an issue.

[3cat]

OP, you should hold to maturity and basis will not be an issue.

I'm holding two bonds that mature in Dec 2025 and Jan 2026. Some of the bonds do not mature until 2035-2039, beyond my dad's likely life span. I want to place the bond money in short-duration bond funds to meet my dad's needs and to simplify the portfolio.

Fortunately, I was able to find almost all of the original purchase tickets and determine cost basis. I've already sold a few bonds for a long-term capital loss. I can sell the other long-term bonds for long-term gains, but the gains are very close to the losses, so the bonds will come out close to even. I'm just waiting now for the approaching dividend distributions before the end of the year.

3cat