Taxation of Treasuries

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AAA
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Taxation of Treasuries

Post by AAA »

Anticipating doing my 2023 taxes, I've tried searching this topic but it gets complicated quickly whereas I think my question is relatively simple. I've recently been purchasing Treasuries and, without checking my account, I think all have been at discount i.e. the price paid is less than the value of the bond at maturity. When the bond matures, is there a capital gains tax on the difference or is that treated as income and reported on a 1099-INT?

For completeness, if the bond is purchased at premium, i.e. higher than the value at maturity, is that treated as a capital loss?

In both cases assume the bond is held until maturity.

Thanks.
Last edited by AAA on Sun Feb 04, 2024 7:41 am, edited 1 time in total.
jebmke
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Re: Taxation of Treasuries

Post by jebmke »

everything is ordinary income unless you sell at gain or loss.
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FactualFran
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Re: Taxation of Treasuries

Post by FactualFran »

The discount is taxed as ordinary income. The discount is reported either (1) on the income tax return for the year when the bond matures (or is otherwise disposed) or (2) on the income return for each year during which the bond is owned, using a discount accrual method allowed by the IRA.

The premium is part of the basis of the bond. The premium is a capital loss unless it is amortized each year during which the bond is owned. Amortizing the premium is usually done because it reduces the interest income each year. In terms of taxes paid, having less ordinary income is better than having the same amount as a capital loss.
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sat Feb 03, 2024 2:53 pm The discount is taxed as ordinary income. The discount is reported either (1) on the income tax return for the year when the bond matures (or is otherwise disposed) or (2) on the income return for each year during which the bond is owned...
Which is done by default by Vanguard or Fidelity?
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Re: Taxation of Treasuries

Post by FactualFran »

AAA wrote: Sun Feb 04, 2024 7:44 am Which is done by default by Vanguard or Fidelity?
In general, the default is to include the discount as income when the bond is disposed. That is the default used by Fidelity with fixed income securities covered by government regulations that brokerages keep track of the tax basis. I don't know what Vanguard uses as the default.
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sat Feb 03, 2024 2:53 pm The discount is taxed as ordinary income. The discount is reported either (1) on the income tax return for the year when the bond matures (or is otherwise disposed) or (2) on the income return for each year during which the bond is owned, using a discount accrual method allowed by the IRA.
I'm confused. Some Treasury items were redeemed at maturity during 2023 in my Fidelity account. The redemptions are reported in a 1099-B (capital gains) not a 1099-INT (interest).
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Re: Taxation of Treasuries

Post by student »

AAA wrote: Sat Feb 10, 2024 6:43 am
FactualFran wrote: Sat Feb 03, 2024 2:53 pm The discount is taxed as ordinary income. The discount is reported either (1) on the income tax return for the year when the bond matures (or is otherwise disposed) or (2) on the income return for each year during which the bond is owned, using a discount accrual method allowed by the IRA.
I'm confused. Some Treasury items were redeemed at maturity during 2023 in my Fidelity account. The redemptions are reported in a 1099-B (capital gains) not a 1099-INT (interest).
T-bills or T-bonds. Have you read viewtopic.php?t=390405 In particular, viewtopic.php?p=6975607#p6975607
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Re: Taxation of Treasuries

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student wrote: Sat Feb 10, 2024 6:47 am T-bills or T-bonds. Have you read viewtopic.php?t=390405 In particular, viewtopic.php?p=6975607#p6975607
I'd have to look but I bought several on the secondary market and they no doubt included some bonds. These were bought at discount and held to maturity.

I looked through your links and there's no way I'm going to get a complete understanding of all this in a short amount of time. My understanding was that the difference between the purchase price and the redemption price is treated as interest (and I know about accrued interest) so I was surprised to see them showing up on schedule 1099-B.

If this is correct and there's nothing for me to do about it, then I'll just enter it as such in my tax program (actually isn't that a benefit as capital gains rates are lower than ordinary income rates?) and swear off ever buying these things again.
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Re: Taxation of Treasuries

Post by FactualFran »

AAA wrote: Sat Feb 10, 2024 6:43 am I'm confused. Some Treasury items were redeemed at maturity during 2023 in my Fidelity account. The redemptions are reported in a 1099-B (capital gains) not a 1099-INT (interest).
The accrued market discount is reported on Form 1099-B, not 1099-INT. However, by following the income tax return instructions, that amount will be included as interest income on the income tax return. Details are in the How To Complete Form 8949 section of the Instructions for Form 8949. In this case, code D should be entered in column (f).
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Re: Taxation of Treasuries

Post by neurosphere »

And just in case it's relevant, while Treasury INTEREST is not taxable by the state, sometimes the accrued market discount IS taxable state income. North Carolina is one such state (I think).
If you have to ask "Is a Target Date fund right for me?", the answer is "Yes" (even in taxable accounts).
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sat Feb 10, 2024 9:41 am The accrued market discount is reported on Form 1099-B, not 1099-INT. However, by following the income tax return instructions, that amount will be included as interest income on the income tax return.
Ok thanks. I'll just feed all the data to the H&R Block program.
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Re: Taxation of Treasuries

Post by student »

AAA wrote: Sat Feb 10, 2024 9:24 am
student wrote: Sat Feb 10, 2024 6:47 am T-bills or T-bonds. Have you read viewtopic.php?t=390405 In particular, viewtopic.php?p=6975607#p6975607
I'd have to look but I bought several on the secondary market and they no doubt included some bonds. These were bought at discount and held to maturity.

I looked through your links and there's no way I'm going to get a complete understanding of all this in a short amount of time. My understanding was that the difference between the purchase price and the redemption price is treated as interest (and I know about accrued interest) so I was surprised to see them showing up on schedule 1099-B.

If this is correct and there's nothing for me to do about it, then I'll just enter it as such in my tax program (actually isn't that a benefit as capital gains rates are lower than ordinary income rates?) and swear off ever buying these things again.
My rudimentary understanding on T-bonds is the following: If you bought a $10,000 bond at $9,999 in secondary market, and during holding you earned $10, then at redemption, you were paid $10,000. Therefore $10 in Box 3 and $1 capital gain. If the $10 interest covers period another party was holding the bond, there will be a deduction from $10 as part of it belongs to someone else, so you do not get the $10 in its entirety and Box 3 will be adjusted accordingly. I have never hold T-bonds, so I can't be sure what is the correct reporting on 1099.
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sat Feb 10, 2024 9:41 am The accrued market discount is reported on Form 1099-B, not 1099-INT. However, by following the income tax return instructions, that amount will be included as interest income on the income tax return.
I'm up to entering this in H&R Block but it says this part of the interview is not ready yet so I have to wait for, hopefully, the next update. I assume that it will ask me the appropriate questions. But also I think this means that I can't combine all 1099-B items of a certain category, e.g. basis reported to IRS, if it would mix, say, CD's and Treasuries.
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Re: Taxation of Treasuries

Post by FactualFran »

AAA wrote: Sun Feb 11, 2024 6:15 pm I'm up to entering this in H&R Block but it says this part of the interview is not ready yet so I have to wait for, hopefully, the next update. I assume that it will ask me the appropriate questions. But also I think this means that I can't combine all 1099-B items of a certain category, e.g. basis reported to IRS, if it would mix, say, CD's and Treasuries.
With tax preparation software, the user likely does not combine 1099-B items. The items are entered or imported, and the tax preparation software will combine items as the IRS wants the items to be combined in the electronic filing or paper forms.

The categories for the Sales and Other Dispositions of Capital Assets (8949) are six combinations of (short-term, long-term) and (basis was reported to the IRS, basis wasn't reported to the IRS, and sale wasn't reported on a Form 1099-B).
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sun Feb 11, 2024 7:17 pmWith tax preparation software, the user likely does not combine 1099-B items. The items are entered or imported, and the tax preparation software will combine items as the IRS wants the items to be combined in the electronic filing or paper forms.
In anticipation of entering 1099-B data upon the next program update, I’m looking over my consolidated statement from Fidelity. There’s only six items so no great burden to enter individually, but if the program accepts groups I could do it with two entries as they are all treasuries. But I have another question.

There’s a section in the statement called Accrued Interest Paid on Purchases. I know what this term means but the CUSIPs of the two items listed there don’t match any of the six items in the 1099-B. So if I enter each of the latter individually will the program ask if there’s any accrued interest associated with each item, in which case the answer is no, or will it just ask later on for an accrued interest total?

Along those lines, with Vanguard I have some accrued interest which I couldn't use in my 2022 taxes because the particular treasury item hadn't yet paid interest. I need to enter that somewhere also.
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Re: Taxation of Treasuries

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AAA wrote: Mon Feb 12, 2024 2:14 pm There’s a section in the statement called Accrued Interest Paid on Purchases. I know what this term means but the CUSIPs of the two items listed there don’t match any of the six items in the 1099-B. So if I enter each of the latter individually will the program ask if there’s any accrued interest associated with each item, in which case the answer is no, or will it just ask later on for an accrued interest total?
The CUSIPs listed in the Accrued Interest Paid on Purchases section would appear in the 1099-B portion only if you sold a bond on which you paid accrued interest n the same year that you bought it.

I don't know what an income tax preparation program will ask about accrued interest. At some point the program should determine how much of the interest amounts you entered, such as from Forms 1099-INT, was accrued interest that you paid.
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Re: Taxation of Treasuries

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Regarding the accrued interest:

If you have accrued interest from a treasury investment you bought in 2022 which was not used, you can definitely use it against treasury interest in 2023. You'll enter it on your Schedule B, Part I, after your interest tally on Line 1. Some people will write "Accrued Interest" or "ABP Adjustment" or something along those lines. The accrued interest amount will then reduce the total interest you'll see on Line 2.
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Re: Taxation of Treasuries

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So I entered the 1099-B data separately for each of the treasuries that matured in 2023. After all the 1099-B data was entered, including the "accrued market discount," a window came up as follows:

"What's your market discount adjustment?
Since you have a market discount for this sale, we'll need to know your market discount adjustment.
Your market discount adjustment is considered interest income. Tell us the amount here, but you'll also need to enter it in Interest Income (Form 1099-INT)"

It says to enter it as a negative amount. What is "market discount adjustment" and is it relevant to bonds that were held to maturity? I just left it blank.
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Re: Taxation of Treasuries

Post by 50/50 »

neurosphere wrote: Sat Feb 10, 2024 9:44 am And just in case it's relevant, while Treasury INTEREST is not taxable by the state, sometimes the accrued market discount IS taxable state income. North Carolina is one such state (I think).
You are correct about North Carolina.
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Re: Taxation of Treasuries

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AAA wrote: Fri Feb 16, 2024 9:39 am It says to enter it as a negative amount. What is "market discount adjustment" and is it relevant to bonds that were held to maturity? I just left it blank.
Do what the income tax preparation directs: such as entering as a market discount adjustment the negative of the Accrued Market Discount on Form 1099-B. It is relevant for bonds bought at a discount, even when held to maturity.

Confirm that the generated income tax return has a Form 8949 where the row for the Treasury security with an Accrued Market Discount on Form 1099-B has a Gain or Loss (column (h)) of zero.
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Re: Taxation of Treasuries

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FactualFran wrote: Fri Feb 16, 2024 11:22 amConfirm that the generated income tax return has a Form 8949 where the row for the Treasury security with an Accrued Market Discount on Form 1099-B has a Gain or Loss (column (h)) of zero.
Thank you. I did as you suggested. The following is from Form 8949. The second item is a treasury that had an accrued market discount of $837. The layout is a bit confusing but col. h appears to be zero.

But...(there's always a but) if I check out Schedule B in the program's forms, it only show interest and dividends that were reported in 1099-INT and 1099-DIV. If the accrued market discount is treated as ordinary interest, should it show up there or would it be somewhere else?

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Re: Taxation of Treasuries

Post by FactualFran »

AAA wrote: Fri Feb 16, 2024 1:46 pm Thank you. I did as you suggested. The following is from Form 8949. The second item is a treasury that had an accrued market discount of $837. The layout is a bit confusing but col. h appears to be zero.

But...(there's always a but) if I check out Schedule B in the program's forms, it only show interest and dividends that were reported in 1099-INT and 1099-DIV. If the accrued market discount is treated as ordinary interest, should it show up there or would it be somewhere else?

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In a previous post, you included the following instructions from the income tax return software that you use:
Since you have a market discount for this sale, we'll need to know your market discount adjustment.
Your market discount adjustment is considered interest income. Tell us the amount here, but you'll also need to enter it in Interest Income (Form 1099-INT)
It looks like the software wants you to enter a made-up Form 1099-INT with an amount equal to the accrued market discount from Form 1099-B. The program does not automatically include the amount in Schedule B. The made-up Form 1099-INT should likely have "Accrued Market Discount" as the payer.
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Fri Feb 16, 2024 2:41 pmIn a previous post, you included the following instructions from the income tax return software that you use:
Since you have a market discount for this sale, we'll need to know your market discount adjustment.
Your market discount adjustment is considered interest income. Tell us the amount here, but you'll also need to enter it in Interest Income (Form 1099-INT)
It looks like the software wants you to enter a made-up Form 1099-INT with an amount equal to the accrued market discount from Form 1099-B. The program does not automatically include the amount in Schedule B. The made-up Form 1099-INT should likely have "Accrued Market Discount" as the payer.
I had also contacted H&R about this. The rep suggested that I modify Schedule B interest by adding a line with the total accrued market discount. Might that be a simpler alternative?
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Re: Taxation of Treasuries

Post by FactualFran »

AAA wrote: Fri Feb 16, 2024 3:33 pm I had also contacted H&R about this. The rep suggested that I modify Schedule B interest by adding a line with the total accrued market discount. Might that be a simpler alternative?
Entering a made-up 1099-INT would likely be simpler for those subject to state or local income tax. It would have in one place an amount to be treated as U.S. Treasury interest, rather than manually overriding what is on two income tax forms: the federal Schedule B and the state or local income tax form used to exclude U.S. Treasury interest from state and local taxable income.
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sat Feb 17, 2024 9:54 am Entering a made-up 1099-INT would likely be simpler for those subject to state or local income tax. It would have in one place an amount to be treated as U.S. Treasury interest, rather than manually overriding what is on two income tax forms: the federal Schedule B and the state or local income tax form used to exclude U.S. Treasury interest from state and local taxable income.
That appears to be the best alternative. Thank you for your help. It seems odd that the program wouldn't automatically handle what I would think is a fairly common situation.
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sat Feb 17, 2024 9:54 am Entering a made-up 1099-INT would likely be simpler for those subject to state or local income tax.
Almost there !

So in the 1099-INT input window, there's box 3 "Interest on U.S. Savings Bonds and Treasury obligations" where I thought this belonged. But there's also a box 10 "Market Discount" which sounds more relevant. Below is what the Learn More link says about box 10 (I think the statement about interest rates is not correct, but that's beside the point). What confuses me is the statement that the program doesn't use the box 10 amount. So should I keep the date in box 3?

Market Discount
Your financial institution will only use Box 10 for covered securities. These are certain debt obligations acquired after 2013.
A bond has market discount if you buy it for less than its face value. This might occur if interest rates dropped after the bond was issued.
If you chose to include market discount in income while holding the bond, your financial institution will:
Report your accrued market discount in Box 10.
Add the accrued market discount to your basis in the bond.
We don't use the Box 10 amount in our calculations. Refer to the documents your financial institution provided with your Form 1099-INT. These will tell you how to report the Box 10 amount on your return.
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Re: Taxation of Treasuries

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AAA wrote: Sat Feb 17, 2024 1:08 pm So in the 1099-INT input window, there's box 3 "Interest on U.S. Savings Bonds and Treasury obligations" where I thought this belonged. But there's also a box 10 "Market Discount" which sounds more relevant. Below is what the Learn More link says about box 10 (I think the statement about interest rates is not correct, but that's beside the point). What confuses me is the statement that the program doesn't use the box 10 amount. So should I keep the date in box 3?
The purpose of having a made-up 1099-INT is to get the income tax return software to add to the interest income the amount of the accrued market discount reported on Form 1099-B (because the software does not automatically do it).

If I were in the situation, I would put the amount as Treasury interest (Box 3) with the made-up 1099-INT. The taxable income on the state income tax return would not include that amount. By having the amount as Market Discount, the software might need additional entries to have the taxable income on the state income tax return be correct.
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Re: Taxation of Treasuries

Post by AAA »

FactualFran wrote: Sat Feb 17, 2024 2:21 pm If I were in the situation, I would put the amount as Treasury interest (Box 3) with the made-up 1099-INT. The taxable income on the state income tax return would not include that amount. By having the amount as Market Discount, the software might need additional entries to have the taxable income on the state income tax return be correct.
Done. I greatly appreciate your guidance in this matter and have taken copious notes for next year.
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