Tax concerns about buying CDs at discount/premium

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Topic Author
Van
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Joined: Wed Oct 27, 2010 9:24 am

Tax concerns about buying CDs at discount/premium

Post by Van » Thu Jan 10, 2019 10:18 am

Please share your experience with the tax consequences of buying CDs at a discount or premium to par. I have always bought brokered new issue CDs at par and not had to deal with the tax consequences of purchasing at a discount or a premium.

I have read enough to know that the discount or premium is amortized over time. My understanding is that the 1099-OID one receives from the issuer of the bond takes care of those calculations. Have you had any problems with this? Is it straightforward to enter data from the 1099-OID when you do your taxes?

What about when the CD matures? If the discount or premium has been amortized, there should be no capital gain or loss. Have you had any problems with this? Is your cost basis adjusted by the issuer of the 1099-B back to par or do you have to do something (fill out another form or whatever)?

Basically I would like to know if this all goes smoothly and I should quit worrying about it or if it is a headache.

I would appreciate it if you could share your experiences with CDs bought at a discount or a premium.

Van

Topic Author
Van
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Joined: Wed Oct 27, 2010 9:24 am

Re: Tax concerns about buying CDs at discount/premium

Post by Van » Thu Jan 10, 2019 11:23 am

I'm surprised that no one responded to this post.

I guess I'm the only one that has shied away from secondary CDs because of concerns related to the tax issues.

fabdog
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Location: Williamsburg VA

Re: Tax concerns about buying CDs at discount/premium

Post by fabdog » Thu Jan 10, 2019 11:27 am

I have not done this for CD's, but entering a 1099 with OID is simple in Turbotax. If you have premium getting amortized that should get reported as well, and you'd need to enter an "offset" to your taxable interest for the premium amortization (it's returning your purchase). Make a separate entry titled amortization of interest and enter the amortization of premium as a negative number

There shouldn't be anything "extra" you need to do at maturity, it should be all set by then

Mike

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HueyLD
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Re: Tax concerns about buying CDs at discount/premium

Post by HueyLD » Thu Jan 10, 2019 11:41 am

Van,

If your brokerage account is with Fidelity, you will be provided with all the tax information you need.

In the old days, an investor had to calculate premium amortization and discount accretion. But it is the brokerage’s responsibility now.

I don’t know anything about VBS.

BTW, you won’t get a 1099-OID as market discounts and premiums are not OID.

Topic Author
Van
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Joined: Wed Oct 27, 2010 9:24 am

Re: Tax concerns about buying CDs at discount/premium

Post by Van » Thu Jan 10, 2019 11:46 am

HueyLD wrote:
Thu Jan 10, 2019 11:41 am
Van,

If your brokerage account is with Fidelity, you will be provided with all the tax information you need.

In the old days, an investor had to calculate premium amortization and discount accretion. But it is the brokerage’s responsibility now.

I don’t know anything about VBS.

BTW, you won’t get a 1099-OID as market discounts and premiums are not OID.
Are you sure about not getting a 1099-OID? OID stands for original issue discount.

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HueyLD
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Re: Tax concerns about buying CDs at discount/premium

Post by HueyLD » Thu Jan 10, 2019 11:53 am

Yes.

You may want to read the instructions for Form 1099-INT and 1099-OID. https://www.irs.gov/pub/irs-pdf/i1099int.pdf

As I said earlier, your brokerage should do the work for you.

DaftInvestor
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Re: Tax concerns about buying CDs at discount/premium

Post by DaftInvestor » Thu Jan 10, 2019 11:54 am

Van wrote:
Thu Jan 10, 2019 11:23 am
I'm surprised that no one responded to this post.
It was only open for an hour (or a little over) - correct? A lot of folks just check in daily or maybe even weekly so give it some time.

talzara
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Re: Tax concerns about buying CDs at discount/premium

Post by talzara » Thu Jan 10, 2019 1:00 pm

HueyLD wrote:
Thu Jan 10, 2019 11:41 am
In the old days, an investor had to calculate premium amortization and discount accretion. But it is the brokerage’s responsibility now.
The brokerage will amortize market premiums.

However, it will not accrue market discounts unless you notify them that you're making this election. Otherwise, the brokerage will report all of the market discount at maturity as ordinary interest.

Please see this thread on the same topic from last month:

Topic Author
Van
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Joined: Wed Oct 27, 2010 9:24 am

Re: Tax concerns about buying CDs at discount/premium

Post by Van » Fri Jan 11, 2019 7:45 am

Thanks to the responders. Very helpful.

Among other misconceptions, I was incorrectly equating original issue discount with market discount.

Van

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