#cruncher I'm somewhat confused. Maybe you can sort the tax speak for us. It looks like there have been subsequent rulings.
#Cruncher wrote:The coupon was 0.125% which is the smallest coupon allowed by Treasury rules on a note or bond.
I wasn't aware that there was a 1/8 minimum before but now i seems different maybe?
Internal Revenue Bulletin: 2014-6 wrote:Prior to the issuance of the temporary regulations, the IRS and the Treasury Department had received questions about an electing holder’s treatment of a taxable zero coupon debt instrument, including a Treasury bill, acquired at a premium and with a negative yield
The words zero coupon, premium and negative yield implied the situation that occurred Thursday and I took it as allowing a zero coupon TIPS. Apparently I was incorrect and the 1/8 minimum still holds. But this is of no real consequence.
#Cruncher wrote:1.25% would be the correct de minimis amount for a 5-year issue. However, this refers to a discount, not a premium:
Internal Revenue Bulletin: 2013-12 wrote:During the consideration of the final regulations relating to TIPS issued with more than a de minimis amount of premium, the Treasury Department and the IRS received questions about the holder’s treatment of a taxable zero coupon debt instrument, including a Treasury bill, acquired at a premium and a negative yield.
So the de minimis rules also apply to TIPS apparently.
In any case for the five year TIPS auction we can elect to amortize the bond premium and in some cases deduct from the OID as well as the stated interest if any but if there is carry over in the end it is not a capital loss g=but an ordinary income offset.
The Treasury Department and the IRS, however, believe that the amount of the bond premium carry forward in this situation should be treated as a bond premium deduction under section 171(a)(1) rather than as a capital loss for the holder’s taxable year in which the sale, retirement, or other disposition occurs.
I can certainly be misinterpreting these bulletins. Nevertheless I intend to amortize the premium by some reasonable calculation. I am sure that the amounts are not going to be so far off to cause me any hassle with the IRS. After all it's less about the amount of tax that is due but rather when it is paid.
What I think is more of a question is 1) why the Treasury's real yield numbers were so far off from the actual and 2) why the YTM on the new issue was higher
than either the Jan or July 2019 issues already outstanding. I thought the opposite was more common.
On the run securities are generally more liquid and trade at a premium to other securities.
Apparently even bond professionals don't like negative yields.
A scientist looks for THE answer to a problem, an engineer looks for AN answer and lawyers ONLY have opinions. Investing is not a science.