Tax Reporting for Brokered CDs

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sport
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Tax Reporting for Brokered CDs

Post by sport » Thu Dec 13, 2018 10:25 am

If I buy a brokered CD in the secondary market, the price will be different from 100. How do I report the difference between the purchase price and the return of principle at maturity for a taxable account. Is this something I have to calculate each year, or will it just be included as part of the interest shown on the 1099?

rasta
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Re: Tax Reporting for Brokered CDs

Post by rasta » Thu Dec 13, 2018 11:33 am

you will report this like any other purchase/sale on schedule d.

cd has a purchase price and a sales price, the difference is either a gain or a loss.

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sport
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Re: Tax Reporting for Brokered CDs

Post by sport » Thu Dec 13, 2018 11:58 am

I know that is how it works for stocks. I thought for bonds, there is imputed interest each year, if bought at a discount. CDs would be the same as bonds.

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dm200
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Re: Tax Reporting for Brokered CDs

Post by dm200 » Thu Dec 13, 2018 12:01 pm

rasta wrote:
Thu Dec 13, 2018 11:33 am
you will report this like any other purchase/sale on schedule d.

cd has a purchase price and a sales price, the difference is either a gain or a loss.
I do not believe this is correct.

RudyS
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Re: Tax Reporting for Brokered CDs

Post by RudyS » Thu Dec 13, 2018 12:02 pm

My thought is to just work off whatever 1099 forms you receive. I think there is an entry for Original Issue Discount on the 1099-INT that would (might?) apply here.

stlutz
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Re: Tax Reporting for Brokered CDs

Post by stlutz » Thu Dec 13, 2018 12:13 pm

Suppose you buy one at 95. In the year in matures your 1099 will show a $5 capital gain with a "D" adjustment code. The result is that you'll actually show a $0 capital gain and you'll add a line for "Accrued Market Discount" of $5 on your Schedule B.

If you use tax software it will handle it properly for you.

talzara
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Re: Tax Reporting for Brokered CDs

Post by talzara » Thu Dec 13, 2018 12:31 pm

sport wrote:
Thu Dec 13, 2018 10:25 am
If I buy a brokered CD in the secondary market, the price will be different from 100. How do I report the difference between the purchase price and the return of principle at maturity for a taxable account. Is this something I have to calculate each year, or will it just be included as part of the interest shown on the 1099?
You can either accrue the market discount or report it all at maturity. The market discount is always taxed as interest. If you sell before maturity, you report the market discount as interest and anything above that as capital gains.

See Publication 550:
When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income. If you do not make this choice, the following rules generally apply.
  • You must treat any gain when you dispose of the bond as ordinary interest income, up to the amount of the accrued market discount.
... If you did not choose to include the discount in income as it accrued, you must report gain as ordinary interest income up to the instrument's accrued market discount. ... The rest of the gain is capital gain.

https://www.irs.gov/pub/irs-pdf/p550.pdf
You must elect to accrue the market discount. Otherwise, the brokerage will report it all at maturity. Here are the IRS instructions for form 1099-INT:
For a covered security acquired with market discount, if the taxpayer notified you that a section 1278(b) election was made, enter the amount of market discount that accrued on the debt instrument during the tax year in the amount of $10 or more. For more details, see Regulations section 1.6045-1(n).

https://www.irs.gov/instructions/i1099i ... 9715173360
Last edited by talzara on Thu Dec 13, 2018 12:40 pm, edited 2 times in total.

talzara
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Re: Tax Reporting for Brokered CDs

Post by talzara » Thu Dec 13, 2018 12:35 pm

RudyS wrote:
Thu Dec 13, 2018 12:02 pm
My thought is to just work off whatever 1099 forms you receive. I think there is an entry for Original Issue Discount on the 1099-INT that would (might?) apply here.
The OP purchased a secondary CD, so it would be a Market Discount. Original Issue Discount is only for the original issue, not for the secondary market.

It's more complicated if a bond has both OID and market discount. However, most brokered CDs do not have any OID.

livesoft
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Re: Tax Reporting for Brokered CDs

Post by livesoft » Thu Dec 13, 2018 12:40 pm

Many CDs bought at brokerages are first issue and not so-called secondary CDs. Many people confuse all CDs bought at brokers as brokered CDs. The OP made a clear distinction, thanks!
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Topic Author
sport
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Re: Tax Reporting for Brokered CDs

Post by sport » Thu Dec 13, 2018 12:43 pm

Thanks for the info on market discounts.
If instead of a market discount, I pay a market premium, say 105. How is that handled?

talzara
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Re: Tax Reporting for Brokered CDs

Post by talzara » Thu Dec 13, 2018 12:58 pm

sport wrote:
Thu Dec 13, 2018 12:43 pm
Thanks for the info on market discounts.
If instead of a market discount, I pay a market premium, say 105. How is that handled?
You can elect to amortize bond premium. It's in Publication 550:
Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Under your last entry on line 1, put a subtotal of all interest listed on line 1. Below this subtotal, enter the amortizable bond premium allocable to the interest payments for the year and label this amount “ABP Adjustment”. Subtract this amount from the subtotal, and enter the result on line 2.
The brokerage will amortize unless you notify them otherwise. Here's what the 1099-INT instructions say:
For a taxable covered security acquired at a premium (other than a U.S. Treasury obligation), enter the amount of bond premium amortization allocable to the interest paid during the tax year, unless you were notified in writing that the holder did not want to amortize bond premium under section 171. See Regulations sections 1.6045-1(n)(5) and 1.6049-9(b).

Topic Author
sport
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Re: Tax Reporting for Brokered CDs

Post by sport » Thu Dec 13, 2018 1:01 pm

Many thanks to everyone for the comprehensive answers to my questions. I think taxes are more complicated than investing.

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dm200
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Re: Tax Reporting for Brokered CDs

Post by dm200 » Thu Dec 13, 2018 2:31 pm

Good reasons to buy original issue brokered CDs... :sharebeer

stlutz
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Re: Tax Reporting for Brokered CDs

Post by stlutz » Fri Dec 14, 2018 1:01 am

The other thing you'll want to keep track of (and that most brokers provide in a year end summary) is how much accrued interest you paid upon purchase. That amount is subtractible from your interest income. This is one thing that is not recorded on your 1099.

OnTrack
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Re: Tax Reporting for Brokered CDs

Post by OnTrack » Fri Dec 14, 2018 1:38 am

stlutz wrote:
Fri Dec 14, 2018 1:01 am
The other thing you'll want to keep track of (and that most brokers provide in a year end summary) is how much accrued interest you paid upon purchase. That amount is subtractible from your interest income. This is one thing that is not recorded on your 1099.
Does tax software handle the accrued interest?

stlutz
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Re: Tax Reporting for Brokered CDs

Post by stlutz » Fri Dec 14, 2018 2:09 am

Yes, tax software handles it just fine. You just have to tell it that the adjustment exists.

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