original cost/adjusted basis for a bond
April 11, 2008 4:24 AM Subscribe
Strips-Tint-US Treasury (bonds)... I need to know the original cost/adjusted basis for reference number: XXXXXXXXX and XXXXXXXXX. What is my tax person asking? How do I get this info? Google has failed me.
Best answer: Yeh, this is of personal interest as I used to invest in STRIPS as gains were only taxed at maturity (or when you sold the bond). It was a neat loophole at the time, one that's sadly missed.
Now, of course, things are different (/mumble about being taxed to death), and what's happening is you are taxed on the implied gain for securities you're holding, even though you receive no economic benefit before maturity.
Conceptually the math is pretty simple but painfully involved; the cleanest way to determine adjusted basis is to ask your broker as there are all sorts of assumptions and decisions to be made - none right or wrong mind you - that will impact the results of any calculation undertaken.
So I'd suggest that you make every effort to get your broker to provide these results. FWIW, I work in banking, could (not so easily) do these calculations myself, and I certainly don't calculate this myself. My free time is best left untarnished by such experiences ...
But since I love finance, and have in the past verified my tax preparers calculations on STRIPS I've been holding, let me dive in and maybe this will help if you'd like to - or unfortunately must - pursue this on your own.
For purposes of calculating adjusted basis, you need to know
Purchase price is exactly what you'd think - what you paid for this security (without commissions please).
Purchase date, or when you acquired the security. This would be settlement date, not when you did the trade.
Maturity value is the face value of the bond, or what you expect to receive when the security matures. Assuming these are US Treasuries, it's probably $1,000. If you're holding a corporate this may be different; its not uncommon to see corporate zeroes with redemption values of $5,000 or $10,000. If you're not holding US Treasuries things are going to be a lot more complicated, as you're entitled to credit on your US taxes for foreign taxes paid. Even more fun when tax years don't precisely overlap.
Maturity date is again pretty simple - the date the bond will mature, or cease to be paid interest.
Have they mentioned Original Issue Discount (OID) at all? This will be the difference between the value of your bond at maturity (e.g., $1,000, aka maturity value) and what you paid (purchase price); it's the discount or the equivalent of interest you'll receive at maturity for holding the debt instrument. If you have to calculate OID the relationship could be represented as :
So putting this all together, Adjusted basis will be the OID adjusted for any implied gains you've previously reported and been taxed on. In other words, your Adjusted basis will increase every year you hold the STRIP, reflecting the implied gain you've paid taxes on.
The last part is of particular interest because, to expand on jozxyqk's response, you need to make sure you're not taxed on either funds that were originally yours, or money you've already paid taxes on.
Now adjustments; there are two mechanisms that have been approved for use by the IRS; "Constant Yield" (aka "Constant Interest") and "Ratable". Believe it or not, they did this not to complicate matters, but for your benefit (yes, seriously). Although the two will return different results, its really up to you (or your broker) to select one and be prepared to answer (if necessary) which one was used. The IRS will already know as they will back into your results while verifying your calculations.
IRS publication 550, starting on page 15 will give you a good overview of tax treatment of bonds in general, while IRS publication 1212 presents examples of both Constant Yield and Ratable calculations.
Its up to you to select a mechanism from the publications above for your calculations.
As I mentioned, unless you're forced (or want) to calcuate this yourself, its best left to your broker or accountant.
Hope this helped - convince you to ask your broker. Your accountant no doubt can carry out this calculation, however he or she will charge you. Your broker's internal systems, assuming you purchased the STRIP through them (or reported the OID when you transferred the asset) will already know.
posted by Mutant at 7:40 AM on April 11, 2008 [2 favorites]
Now, of course, things are different (/mumble about being taxed to death), and what's happening is you are taxed on the implied gain for securities you're holding, even though you receive no economic benefit before maturity.
Conceptually the math is pretty simple but painfully involved; the cleanest way to determine adjusted basis is to ask your broker as there are all sorts of assumptions and decisions to be made - none right or wrong mind you - that will impact the results of any calculation undertaken.
So I'd suggest that you make every effort to get your broker to provide these results. FWIW, I work in banking, could (not so easily) do these calculations myself, and I certainly don't calculate this myself. My free time is best left untarnished by such experiences ...
But since I love finance, and have in the past verified my tax preparers calculations on STRIPS I've been holding, let me dive in and maybe this will help if you'd like to - or unfortunately must - pursue this on your own.
For purposes of calculating adjusted basis, you need to know
- Purchase price
- Purchase date
- Maturity value
- Maturity date
Purchase price is exactly what you'd think - what you paid for this security (without commissions please).
Purchase date, or when you acquired the security. This would be settlement date, not when you did the trade.
Maturity value is the face value of the bond, or what you expect to receive when the security matures. Assuming these are US Treasuries, it's probably $1,000. If you're holding a corporate this may be different; its not uncommon to see corporate zeroes with redemption values of $5,000 or $10,000. If you're not holding US Treasuries things are going to be a lot more complicated, as you're entitled to credit on your US taxes for foreign taxes paid. Even more fun when tax years don't precisely overlap.
Maturity date is again pretty simple - the date the bond will mature, or cease to be paid interest.
Have they mentioned Original Issue Discount (OID) at all? This will be the difference between the value of your bond at maturity (e.g., $1,000, aka maturity value) and what you paid (purchase price); it's the discount or the equivalent of interest you'll receive at maturity for holding the debt instrument. If you have to calculate OID the relationship could be represented as :
OID = Maturity value - Purchase price(technically OID is the price the bond was issued at, but assuming you didn't purchase at issuance this definition will apply)
So putting this all together, Adjusted basis will be the OID adjusted for any implied gains you've previously reported and been taxed on. In other words, your Adjusted basis will increase every year you hold the STRIP, reflecting the implied gain you've paid taxes on.
The last part is of particular interest because, to expand on jozxyqk's response, you need to make sure you're not taxed on either funds that were originally yours, or money you've already paid taxes on.
Now adjustments; there are two mechanisms that have been approved for use by the IRS; "Constant Yield" (aka "Constant Interest") and "Ratable". Believe it or not, they did this not to complicate matters, but for your benefit (yes, seriously). Although the two will return different results, its really up to you (or your broker) to select one and be prepared to answer (if necessary) which one was used. The IRS will already know as they will back into your results while verifying your calculations.
IRS publication 550, starting on page 15 will give you a good overview of tax treatment of bonds in general, while IRS publication 1212 presents examples of both Constant Yield and Ratable calculations.
Its up to you to select a mechanism from the publications above for your calculations.
As I mentioned, unless you're forced (or want) to calcuate this yourself, its best left to your broker or accountant.
Hope this helped - convince you to ask your broker. Your accountant no doubt can carry out this calculation, however he or she will charge you. Your broker's internal systems, assuming you purchased the STRIP through them (or reported the OID when you transferred the asset) will already know.
posted by Mutant at 7:40 AM on April 11, 2008 [2 favorites]
This thread is closed to new comments.
This number is how much the thing (the bond, in your case) cost when it was originally purchased, so you don't get taxed on money that was originally yours.
Unfortunately, this doesn't get regularly reported to you, and you have to go back through your history to figure it out.
I called the Financial Advisor that was attached to the account I had closed, and he was able to give me the correct info.
With bonds, it might be a little easier.
posted by jozxyqk at 5:30 AM on April 11, 2008