Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
"Why stagger the purchases, laddering them a few weeks apart? This allows you to gain from rising interest rates, while also giving you easier access to your cash if you need it."
"As I noted in that July article — and it is still true today — the sweet spot in the T-bill yields seems to be in the 13-week and 26-week maturities. The 26-week is now just 10 basis points lower than the 2-year Treasury, which closed yesterday at 3.86%. The 13-week is desirable because the shorter term allows you to get access faster to future rate increases."
Giggle. I read the title given to this new thread and thought it meant that someone or a group of someones--- known or unknown--- had bought monstrously gigantic amounts of Treasuries.
Giggle. I read the title given to this new thread and thought it meant that someone or a group of someones--- known or unknown--- had bought monstrously gigantic amounts of Treasuries.
Ha, @Crash. We might have been primed to think that since the one prominent use of "staggering" in the media in the last few days was the NY AG's using it to describe the level of bank fraud by TFG.
I do like that TIPS Watch site. And thanks to the Fed, there's a possible Fed rate target peak of roughly 4.5% to enable planning a ladder better. I kind of made a hash of a ladder earlier - put $ into too much at lower rates for too long.
Giggle. I read the title given to this new thread and thought it meant that someone or a group of someones--- known or unknown--- had bought monstrously gigantic amounts of Treasuries.
That's what I thought it meant, too.
I see how the original title could be misinterpreted. I'm sorry about that. I modified the title to hopefully make it clearer.
Giggle. I read the title given to this new thread and thought it meant that someone or a group of someones--- known or unknown--- had bought monstrously gigantic amounts of Treasuries.
That's what I thought it meant, too.
I see how the original title could be misinterpreted. I'm sorry about that. I modified the title to hopefully make it clearer.
Yes the change makes the meaning clear. But I enjoyed being silly and wrong.
Have you guys looked into the tax treatment of holding and later selling Treasuries in the secondary market?
Let us assume the coupon is considerably lower than the yield to maturity (YTM) on the date of issue and the YTM is higher at purchase than at original issue (like in the current yield environment).
There is original issue discount, market discount, and then there is capital gain or loss for consideration.
Does the brokerage calculate and report any or all of these? (I know the investor is responsible for correctly reporting for tax purposes, notwithstanding what the brokerage does but I still want to know what the brokerage does. Taking a position contrary to how the brokerage reports is not fun, even if the brokerage is wrong.)
Is it possible to treat any part of the market discount as capital gain or to treat capital gain /loss as interest income / expense (i.e., reduction of interest income)? Is such a treatment automatic or by a tax election? Does the treatment differ depending on how long one holds the instrument before selling?
(Capital gain may be subject to state income tax but interest on Treasuries is generally not subject to state income tax.)
I will check the Treasury Direct website but I do not expect them to have answers because the situation posed here is buying Treasuries in the secondary market and later selling the same in the secondary market.
I put in an effort to write the above but if any of it is not clear, please ask questions before writing an essay on why you think I am an idiot.
I haven't investigated the tax ramifications of selling Treasuries in the secondary market. Except for I Bonds which I've been purchasing for years, I've started buying Treasuries (13-week / 26-week T-Bills) only recently in May. I buy at auction and hold to maturity.
This is just conceptual and largely off the top of my head, so take it for what it's worth. Also, I'm discussing taxable bonds with (original) maturities of more than one year that are not zeros. So this excludes T-bills and STRIPS. In addition, T-bills are non-covered, so unlike other bounds purchased since 2014, their purchase price may not be reported to the IRS.
OID accretes (it is gradually added to the "natural" price of a bond). This portion of "appreciation" is treated as interest. (Think of a zero; all of the interest is reflected in the increase in price of the bond over time). Since this OID interest comes from the original issuer, here the Treasury, it is taxed the same way as if that interest had been part of the coupon. IOW, state tax exempt, federally taxable.
Market premium or discount is relative to the OID-adjusted price. You will likely sell at a higher or lower discount (or premium) than you got at time of purchase. For example, you might buy bonds with a total discount of $50, but sell them with no discount. This "gain" of $50 is treated differently depending on the YTW at which you bought the bond.
If you bought that bond with the expectation (i.e. YTW) that you would get $30 more at sale (instead of the $50 you got), then $30 is treated as ordinary (not Treasury) interest. After all, you purchased the bond for that yield. Now you lucked out, rates dropped, and you got some extra (market) appreciation. That extra appreciation is taxed (fed and state) as a cap gain.
There's a de minimis rule: if the amount of market gain (i.e. excluding OID adjustments) is less than 0.25% x number of years you hold the bond, then the entire accretion (gain) is treated as a cap gain.
What if you bought a bond at a premium and sell it for less, or what if you even bought it at a discount but sold it at a bigger discount? That loss is used to reduce the amount of interest you receive. If you purchased a bond with a 3% coupon, but with a 2% premium, then you're effectively netting 1% in interest. This is reflected in how the bond is taxed.
I'm almost positive I've gotten something not exactly right here. Just trying to sketch the broad outlines.
There are some elections - basically how accretion is calculated (there are multiple methods) and whether one chooses to declare income annually or upon sale.
See Pub 550 generally. And look for explanatory pieces. The IRS is good at mechanics, not so good on explaining the concepts. I'm sure you can find better stuff than what I jotted down here. I haven't looked at this in depth in several years.
"There are some elections - basically how accretion is calculated (there are multiple methods) and whether one chooses to declare income annually or upon sale."
If the above applies to OID as well, I would be interested if you have a citation on top of your head to be able to defer income inclusion annually, allowing an investor to include in income the entire OID amount when the bond matures or when sold. This is particularly useful to a cash basis taxpayer (like us) who does not receive the OID interest until maturity. This can also be very useful if one is buying OID bonds issued by foreign entities / governments. There can be a lot of change in exchange rates after issue date. If the dollar appreciates, one may actually end up losing money on the investment, notwithstanding high OID. It would be worse, if one is required to pay tax on accrued interest each year just to get a big loss at the end when one's tax rate could be lower. (I remember once when I invested in a CD with early withdrawal penalties, the bank issued me a 1099-OID every year even though I did not get the interest until the CD matured.)
Edit: From an earlier post from you - § 1278(b) Election To Include Market Discount Currently. (Without this election, it appears market discount is included in income only upon sale or maturity of the bond.)
Most of the bonds I am currently buying have massive market discounts. If I do not make the section 1278(b) election, it seems Fidelity will include the market discounts at the time of maturity. Not making the election will defer the tax liability to a later year. This election needs to be made by December 31. I may make this election if the brokerage is going to report (without the election) the market discount as capital gain on Form 1099, notwithstanding what they are supposed to do - I spoke with three different Reps and got three different answers.
The statutory text of the deminimis rule you mentioned -
"I.R.C. § 1278(a)(2)(C) De Minimis Rule — If the market discount is less than 1/4 of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the taxpayer acquired the bond), then the market discount shall be considered to be zero."
I added the above Edit info so it may be useful to others.
Comments
Thanks , Derf
I do like that TIPS Watch site. And thanks to the Fed, there's a possible Fed rate target peak of roughly 4.5% to enable planning a ladder better. I kind of made a hash of a ladder earlier - put $ into too much at lower rates for too long.
I see how the original title could be misinterpreted.
I'm sorry about that.
I modified the title to hopefully make it clearer.
Yes the change makes the meaning clear. But I enjoyed being silly and wrong.
Let us assume the coupon is considerably lower than the yield to maturity (YTM) on the date of issue and the YTM is higher at purchase than at original issue (like in the current yield environment).
There is original issue discount, market discount, and then there is capital gain or loss for consideration.
Does the brokerage calculate and report any or all of these? (I know the investor is responsible for correctly reporting for tax purposes, notwithstanding what the brokerage does but I still want to know what the brokerage does. Taking a position contrary to how the brokerage reports is not fun, even if the brokerage is wrong.)
Is it possible to treat any part of the market discount as capital gain or to treat capital gain /loss as interest income / expense (i.e., reduction of interest income)? Is such a treatment automatic or by a tax election? Does the treatment differ depending on how long one holds the instrument before selling?
(Capital gain may be subject to state income tax but interest on Treasuries is generally not subject to state income tax.)
I will check the Treasury Direct website but I do not expect them to have answers because the situation posed here is buying Treasuries in the secondary market and later selling the same in the secondary market.
I put in an effort to write the above but if any of it is not clear, please ask questions before writing an essay on why you think I am an idiot.
Thanks for your help.
Except for I Bonds which I've been purchasing for years, I've started buying Treasuries
(13-week / 26-week T-Bills) only recently in May. I buy at auction and hold to maturity.
OID accretes (it is gradually added to the "natural" price of a bond). This portion of "appreciation" is treated as interest. (Think of a zero; all of the interest is reflected in the increase in price of the bond over time). Since this OID interest comes from the original issuer, here the Treasury, it is taxed the same way as if that interest had been part of the coupon. IOW, state tax exempt, federally taxable.
Market premium or discount is relative to the OID-adjusted price. You will likely sell at a higher or lower discount (or premium) than you got at time of purchase. For example, you might buy bonds with a total discount of $50, but sell them with no discount. This "gain" of $50 is treated differently depending on the YTW at which you bought the bond.
If you bought that bond with the expectation (i.e. YTW) that you would get $30 more at sale (instead of the $50 you got), then $30 is treated as ordinary (not Treasury) interest. After all, you purchased the bond for that yield. Now you lucked out, rates dropped, and you got some extra (market) appreciation. That extra appreciation is taxed (fed and state) as a cap gain.
There's a de minimis rule: if the amount of market gain (i.e. excluding OID adjustments) is less than 0.25% x number of years you hold the bond, then the entire accretion (gain) is treated as a cap gain.
What if you bought a bond at a premium and sell it for less, or what if you even bought it at a discount but sold it at a bigger discount? That loss is used to reduce the amount of interest you receive. If you purchased a bond with a 3% coupon, but with a 2% premium, then you're effectively netting 1% in interest. This is reflected in how the bond is taxed.
I'm almost positive I've gotten something not exactly right here. Just trying to sketch the broad outlines.
There are some elections - basically how accretion is calculated (there are multiple methods) and whether one chooses to declare income annually or upon sale.
See Pub 550 generally. And look for explanatory pieces. The IRS is good at mechanics, not so good on explaining the concepts. I'm sure you can find better stuff than what I jotted down here. I haven't looked at this in depth in several years.
"There are some elections - basically how accretion is calculated (there are multiple methods) and whether one chooses to declare income annually or upon sale."
If the above applies to OID as well, I would be interested if you have a citation on top of your head to be able to defer income inclusion annually, allowing an investor to include in income the entire OID amount when the bond matures or when sold. This is particularly useful to a cash basis taxpayer (like us) who does not receive the OID interest until maturity. This can also be very useful if one is buying OID bonds issued by foreign entities / governments. There can be a lot of change in exchange rates after issue date. If the dollar appreciates, one may actually end up losing money on the investment, notwithstanding high OID. It would be worse, if one is required to pay tax on accrued interest each year just to get a big loss at the end when one's tax rate could be lower. (I remember once when I invested in a CD with early withdrawal penalties, the bank issued me a 1099-OID every year even though I did not get the interest until the CD matured.)
Edit: From an earlier post from you - § 1278(b) Election To Include Market Discount Currently. (Without this election, it appears market discount is included in income only upon sale or maturity of the bond.)
You had also included this useful link related to that election - https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/customer-service/fixed-income-reporting-instructions.pdf
Most of the bonds I am currently buying have massive market discounts. If I do not make the section 1278(b) election, it seems Fidelity will include the market discounts at the time of maturity. Not making the election will defer the tax liability to a later year. This election needs to be made by December 31. I may make this election if the brokerage is going to report (without the election) the market discount as capital gain on Form 1099, notwithstanding what they are supposed to do - I spoke with three different Reps and got three different answers.
The statutory text of the deminimis rule you mentioned -
"I.R.C. § 1278(a)(2)(C) De Minimis Rule — If the market discount is less than 1/4 of 1 percent of the stated redemption price of the bond at maturity multiplied by the number of complete years to maturity (after the taxpayer acquired the bond), then the market discount shall be considered to be zero."
I added the above Edit info so it may be useful to others.