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- Manlobbi
Investment Strategies / Bond Investing
No. of Recommendations: 1
I hope this is not too off topic for this Board.
I am new to investing directly in Treasury securities. I live in a state which assesses income taxes with marginal rate of 7%.
I have this year bought a few 3-6 month zero-coupon T Bills at a discount to maturity amount. In the past I invested via Treasury money funds like SNSXX. I decided to buy T-bills to avoid the 34 bp expense of SNSXX.
I understand that the Original Issue Discount that I bought the T-bill for, i.e. the difference between maturity amount and the discounted purchase amount is taxed as ordinary income for Federal income taxes. This OID amount is exempt from state IT.
However, if I sell the security before maturity is the gain reported as OID or capital gain? And if it is reported as capital gain, will it still be exempt from state taxes? My state treats capital gains as ordinary income and charges the same rate on both.
Thanks for your help.
rnam
No. of Recommendations: 2
Not too off-topic, Treasuries fit here as well as commercial bonds.
The tax aspect, though, might get more informed answers over on the Tax Strategies board.
My non-tax expert (and one who doesn't invest in Treasuries of any sort) stab goes something like this: it depends.
Your OID accumulates its recouped value daily, so that (to keep the arithmetic simple, and assuming an ideal world) were you to buy a 90-day $1000 OID issue for $910, after 30 days, its value would be $940. Were you to sell it then, the taxable amount would depend on whether you sold for more or less than those $940. The amount by which more or less likely would be a capital gain or loss, taxable IAW your State's tax law.
Hopefully, an actual expert will chime in and corroborate or disabuse me.
Eric Hines
No. of Recommendations: 3
OID is treated as interest income.
Even if you reported it as capital gains (you should not) it would be < 1 year so STCG,, same as income.
BTW if you want to avoid the hassle of buying treasuries directly, consider CLIP SGOV XHLF ETFs with ERs of 7,9,3 bps respectively.
No. of Recommendations: 1
Rnam this is late but maybe you have not filed your taxes yet.
You wrote:
""I have this year bought a few 3-6 month zero-coupon T Bills""
Short term T-bills are zero-coupon. I would imagine if you sold a short-term t-bill before maturity, it would be at a loss...unless things got really weird with interest rates.
And you typed:
""if I sell the security before maturity is the gain reported as OID or capital gain? And if it is reported as capital gain, will it still be exempt from state taxes.""
When you sell a bond before it matures, you should get the paperwork for the transaction as to how much is accrued interest (OID), and the balance being how much you were paid for the bond. If that amount is more than what you paid for the bond, you have a capital gain. You would probably have to pay state tax on that amount, but call your state tax board for the final answer. If less, you have a capital loss to report.
If you sell or redeem a zero-coupon bond that you have had for multiple years, you may have to go back through your paper work, which should have been sent to you over the years, subtract out the OID interest you have reported, and figure the difference to see if you have a capital gain or loss.
We sold a house around 1980 or so, and I was lucky enough to put all of the receipt into long-term US treasury zero-coupon bonds. At that time interest rates on the 30-year bond were 18% or so. So we bot these at a big discount. Paul Volcker ran the federal reserve board and was able to cut that interest rate in half over the next 3 or 4 years. We were then going to buy a house, so I sold the bonds and had to subtract out the OID that we reported ever year, to compute how much our capital gain was. Today Treasury Direct or your broker will probably be doing that for you.
