brokered cd tax

[Goro]

Hi,

Until now, I have CDs directly from banks. To be simplify, I am thinking to buy brokered CDs from Vanguard. I plan to buy new issue and hold it until mature. I have a concern on tax filing requirement.
For CDs directly from banks, 1099-INT is issued and I need to report the interest based on 1099-INT.
How about for brokered CDs? 1099-INT. And 1099-B if I sell it before the mature? Or even hold it until mature, is 1099-B issued? Any other tax report requirement I should keep in mind?

Thank you for teaching me.

[Kevin M]

Hi,

Until now, I have CDs directly from banks. To be simplify, I am thinking to buy brokered CDs from Vanguard. I plan to buy new issue and hold it until mature. I have a concern on tax filing requirement.
For CDs directly from banks, 1099-INT is issued and I need to report the interest based on 1099-INT.
How about for brokered CDs? 1099-INT. And 1099-B if I sell it before the mature? Or even hold it until mature, is 1099-B issued? Any other tax report requirement I should keep in mind?

Thank you for teaching me.

You will receive 1099 int from broker. Brokered CDs pay interest at different intervals, from monthly to annually.

You will receive 1099 B for the year the CD matures. If you buy at par, there will be no capital gain or loss.

Kevin

[Goro]

Hi Kevin,

Thanks! I understand I will receive 1099-B additionally for brokerage CD.

[Kevin M]

There are some additional tax complexities if you buy a secondary brokered CD at a discount or premium, but for new issue, you pay par (100), so tax reporting is straightforward. Interest on 1099-INT, and 0 capital gain or loss on 1099-B.

[Goro]

Hi Kevin,

Noted. I will click "new issue" when I search and buy it. If I sell it before mature, does it cause any tax complexities than 1099-INT and 1099-B?

[Artsdoctor]

^ Occasionally, you can get a better rate if you buy a CD on the secondary market so it's always worth comparing rates.

If you were to sell a brokered CD before maturity, you have have a capital gain or loss. You should also note going into the transaction that selling brokered CDs may carry a significant cost to you, and I would not consider them "liquid." Meaning, the price you get for the sale of the CD may not be favorable. In general, you should commit to holding brokered CDs until maturity.

[bacon4retirement]

I had also hoped to simply by using brokered CDs. It just seemed to change the complexity rather than reduce it. They were definitely illiquid as well.

[Northern Flicker]

Also, it generally is a good idea to avoid brokered CDs with call options. The issuing bank is better equipped to value the option than you are, and there is no market to value it for you.

[moneyflowin]

If you buy new issue CDs and hold until maturity, it's simple: interest is reported on 1099INT, and your proceeds and cost basis on 1099B will be $1000 par value, which means no capital gains tax

If you buy a secondary issue or sell a new issue before maturity, you may have a capital gains or loss. You'll also have accrued interest that's added to or subtracted from your 1099INT (you create an adjustment on Schedule B). Basically, there's a lot of rules you have to understand about the way capital gains/loss is calculated with bonds. For instance, if you buy at a discount to par, you have to calculate how much of the "gain" is capital gains and how much is interest. It's not as straightforward as with stocks. If you or your tax preparing doesn't know what you're doing, you can overpay taxes. BTW some tax preparers don't understand the accrued interest adjustment and completely miss it

[Goro]

Hi,

I see. In case I use the secondary market (buy or sell), I have to pay attention for tax calculation in the year when I sell it or it matures. For other year, I just need to pay tax based on 1099-INT, correct?

Example,
1. If I buy new issue, I will receive 1099-INT and pay tax every year like I I buy CD from bank directly. Then, when it matures, I will receive 1099-B and report it (no capital gain.)
2. If I buy new issue, I will receive 1099-INT and pay tax every year like I I buy CD from bank directly. Then, if I sell it in secondary market before maturity, I will receive 1099-B and I have to create the adjustment on schedule B in the year when I sell it.
3. If I buy secondary issue, I will receive 1099-INT and pay tax every year like I buy CD from bank directly. Then, when it matures, I will receive 1099-B and I have to create the adjustment on schedule B in the year when it matures.

My plan is to buy new issue and hold it until maturity. But I would like to understand tax filling requirement for brokered CD before I buy it. Thank you for teaching me!

[cas]

I see. In case I use the secondary market (buy or sell), I have to pay attention for tax calculation in the year when I sell it or it matures. For other year, I just need to pay tax based on 1099-INT, correct?

I'm just finishing up an experiment where I dabbled my toes into some 2 year secondary market CDs and treasuries, to get some practical experience on how the tax reporting worked.

Tax reporting for new issue brokered CDs is straightforward.

Tax reporting for secondary market CDs ... not so straightforward. Not awful, but there are fiddly little details that offer the opportunity to forget something from one year to the next and end up overpaying your taxes by a little bit. Depends on which options you choose for dealing with various situations (e.g. accrued interest paid when you purchased the CD/bond, CD/bond bought at a premium, CD/bond bought at a discount), but there may well be stuff (other than 1099-INT interest) you need to report on your tax return every year you own the secondary market CD.

I had to write myself a note every year when I did my taxes and stick it in my tax folder for the next year to remind myself what I'm supposed to do (and what I expect to see on various tax forms sent to my by the brokerage.)

A secondary market CD would need to offer a significantly good deal over a new issue brokered CD in order for me to bother with buying one again. I'm sure the extra interest on my experimental secondary market CDs paid me much less than minimum wage on the extra time it took me to do the taxes.

As is usual with these sorts of things, there are probably other people who think it is all no big deal and well worth buying secondary market CDs.

[Goro]

Hi Cas,

Thanks! I understand I have to do extra manual adjustment every year if I buy secondary market CD. I am lazy and I want to avoid the potential mistake which I do not submit the tax return correctly. So, I will make sure to buy new issue CD.

[Northern Flicker]

The tax issue with a secondary market CD would be that the basis price you pay for it may not be par, so that there will be a gain or loss at maturity. The bid-ask spreads also will be wide on a secondary market, but you should have a quote of yield to maturity at the purchase price to compare to other options.

Currently, a 5 year brokered CD is paying 4bp above a 5-yr treasury, which would not be worth it to me to take on the much lower liquidity. For shorter terms, a treasury has a slightly higher yield.

Broker CDs often offer the ability to liquidate at par upon death of the owner.

[Goro]

thanks. I am thinking around 2 year terms.

Until now, my experience is index stock fund, i-BOND and CD directly from bank. I do not have the experience treasury. I think I need to learn the treasury since I am getting close to the retirement.

[FactualFran]

Thanks! I understand I have to do extra manual adjustment every year if I buy secondary market CD. I am lazy and I want to avoid the potential mistake which I do not submit the tax return correctly. So, I will make sure to buy new issue CD.

Aren't brokered CDs covered by IRS regulations that have brokers report to the IRS and you all the values that need to included in income tax returns, including premium amortization, discount accrual, and capital gain (or loss) when sold?

[Artsdoctor]

Hi Cas,

Thanks! I understand I have to do extra manual adjustment every year if I buy secondary market CD. I am lazy and I want to avoid the potential mistake which I do not submit the tax return correctly. So, I will make sure to buy new issue CD.

I think this is wise. Buying a brokered CD on the secondary market is far easier in a tax-advantaged account because there's no bookkeeping involved. If you fiddle around with buying a brokered CD in your taxable account, you'll need to amortize the premium over the life of the CD (if it's bought at a premium) or pay capital gains on maturity (if bought at a discount). Since you have the easier alternative of buying a new CD at issue, I'd opt for that to make your life easier.

[cas]

Aren't brokered CDs covered by IRS regulations that have brokers report to the IRS and you all the values that need to included in income tax returns, including premium amortization, discount accrual, and capital gain (or loss) when sold?

I just find it ... fiddly. (This feeling is probably aggravated because tax-time 2020 (for 2019 return ) was the first time I had to figure out how to tickle Turbotax correctly to do all the relevant reporting, the pandemic had just hit, I was busy trying to keep elderly relatives safe, and I just wasn't in the frame of mind to be interested in expanding my knowledge of tax reporting minutiae.)

Accrued interest paid to seller is something that is buried way in the back on an information page in the consolidated 1099 from the brokerage, so not imported into a tax program. And I managed to hit the situation where it is buried way in the back of a consolidated 1099 in a different year than first interest was received, so I had to wade into the detail weeds there. (Relevant boglehead's thread: Reporting Accrued Bond Interest Paid )

I apparently never figured out the right way to calculate the amortized bond premium, because the brokerage always reported something different than what I calculated. I forgot to account for commission paid to brokerage, so a CD I thought I bought at a discount was actually bought at a premium, which I figured out only when the 1099s didn't match what I expected. So I haven't yet had to deal with market discount and choosing accrual -vs- "D" adjustment code stuff. (And I was dealing with tax returns that had cliff income thresholds, so I feel better being able to predict exactly what my tax reporting is going to be.) (Relevant boglehead's thread: Tax Reporting for Brokered CDs, especially the discussion after talzara chimes in.)

I'm sure it would all become routine if I did it enough, but I didn't find the juice worth the squeeze for the amounts I was dealing with. And, since I do tax returns for elderly relatives, it is always sort of on my mind that this isn't the sort of fiddly thing I would want someone else to have to figure out if I unexpectedly departed this life or became incompetent to do my own taxes.

[Northern Flicker]

The treasury mutual funds FUMBX and FUAMX, or ETFs VGSH and VGIT have ERs of 3 or 4 basis points per year. It is likely that having coupon payments reinvested into the portfolio right when the income is realized by the portfolio will, by itself, be worth more than the ER. The net asset value (NAV) of a brokered CD ladder will fall just like for a bond fund if rates rise. But with a treasury fund, you always can make a withdrawal at NAV, whereas that is unlikely for a brokered CD ladder due to low liquidity and wide spreads if selling a CD. And you will get clean, self-contained 1099's.

Treasuries are exempt from state or local income taxes. CDs are not.

[Goro]

Hi,

Instead of brokered CD, I am thinking to buy treasury bill/note (maybe 1 or 2 year) at Vanguard. Not secondary market. In this case, will I receive 1099-INT from Vanguard? Or, also 1099-B? I do not have any experience to buy/hold treasury note.

[SlowMovingInvestor]

The treasury mutual funds FUMBX and FUAMX, or ETFs VGSH and VGIT have ERs of 3 or 4 basis points per year. It is likely that having coupon payments reinvested into the portfolio right when the income is realized by the portfolio will, by itself, be worth more than the ER. The net asset value (NAV) of a brokered CD ladder will fall just like for a bond fund if rates rise. But with a treasury fund, you always can make a withdrawal at NAV, whereas that is unlikely for a brokered CD ladder due to low liquidity and wide spreads if selling a CD. And you will get clean, self-contained 1099's.

Should one expect yields for mutual funds such as FUMBX to rise strongly over the next few months as securities mature and rollover?

[water2357]

I see that various people mentioned that the original issue brokered CDs held to maturity would be listed on a 1099B at maturity and that the gain/loss would be zero. I'm not sure it was clear that this would require the completion of at least a 1040 Schedule D to be filed and possibly a form 8949. This is not like a mutual fund capital gains distribution that can be reported only and directly on form 1040.

[Kevin M]

Should one expect yields for mutual funds such as FUMBX to rise strongly over the next few months as securities mature and rollover?

The fund yield increases as the yields of the bonds it holds increases. It doesn't require securities to mature and rollover.

What increases as securities roll over to higher coupon rate securities is the distribution yield, which is related to the coupon rates of the bonds (not the yields).

Kevin

[Kevin M]

Hi,

Instead of brokered CD, I am thinking to buy treasury bill/note (maybe 1 or 2 year) at Vanguard. Not secondary market. In this case, will I receive 1099-INT from Vanguard? Or, also 1099-B? I do not have any experience to buy/hold treasury note.

Yes.

[Goro]

Hi Kevin,

Thanks! I will buy the treasury bill/note.

[FactualFran]

Instead of brokered CD, I am thinking to buy treasury bill/note (maybe 1 or 2 year) at Vanguard. Not secondary market. In this case, will I receive 1099-INT from Vanguard? Or, also 1099-B? I do not have any experience to buy/hold treasury note.

You will also receive a 1099-B for Treasury Bills sold before maturity and for Treasury Notes regardless of whether sold before maturity or held to maturity.