Treasury Bonds And Notes

March 13, 2024

7633 / When does the holding period begin if Treasury notes and bonds are bought at auction or on a subscription basis?

<div class="Section1">The holding period of United States Treasury notes and bonds sold at auction on the basis of yield generally starts the day after the Secretary of the Treasury, through news releases, gives notification of the acceptance of successful competitive and noncompetitive bids. The holding period of Treasury bonds and notes sold through an offering on a subscription basis at an established yield generally starts the day after the subscription is submitted.<a href="#_ftn1" name="_ftnref1">1</a> (Under some circumstances, a holding period may be tolled or be deemed to have begun at a later date. See, for example, the rules for tax straddles ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7593">7593</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7614">7614</a>).)<div class="Section1"> The donee of a bond can include in his holding period the time the bond was held by the donor.<a href="#_ftn2" name="_ftnref2">2</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Rev. Rul. 78-5, 1978-1 CB 263. <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 1223(2). </div></div>

March 13, 2024

7630 / What are Treasury bonds and Treasury notes?

<div class="Section1">Treasury bonds and notes are obligations of the federal government. They are essentially similar, except that bonds mature in more than 10 years while Treasury notes have maturity dates ranging from one to 10 years. (Thirty-year bonds are auctioned quarterly in February, May, August, and November, with re-openings in the other eight months.) These obligations are issued in denominations ranging from $100 to $5,000,000. Bonds issued after September 3, 1982, and notes issued after 1982 must be in registered form (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7698">7698</a>); however, bearer bonds and notes issued before the registration requirement date may continue to be bought and sold in bearer form. Bearer notes and bonds have coupons attached that are cut off and redeemed, generally through a commercial bank or the Federal Reserve Bank (or a branch). In the case of registered obligations, interest payments are paid to the registered owner by the Treasury Department. Interest is generally payable on these obligations every six months. They are redeemable at maturity for face value.</div>

March 13, 2024

7631 / What does the holder of a Treasury note or bond include in annual income?

<div class="Section1">(1) Unless the note or bond was issued before March 1, 1941 (in which case it may be only partly taxable), stated interest that accrues after the date of purchase is included as ordinary income in the year in which it is received or made available (i.e., as a general rule, the date the coupon becomes due or the interest check is received).<a href="#_ftn1" name="_ftnref1">1</a> If an individual purchased the bond between interest dates and paid the seller interest accrued but not yet due at the date of purchase, the individual does not deduct the amount or include it in basis; instead, the individual recovers that amount tax-free out of the first interest payment received and includes in income only the balance.<a href="#_ftn2" name="_ftnref2">2</a><div class="Section1"> (2) If the bond or note was originally issued at a discount (that is, at a price below the stated maturity or face amount) after July 1, 1982, any holder who did not pay more than the face value of the obligation must include in income each year a daily share of the “original issue discount” as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7650">7650</a>.(A discount of less than ¼ of 1 percent (.0025) times the number of years from issue to maturity may be disregarded. This is normally the case with Treasury notes and bonds.)<a href="#_ftn3" name="_ftnref3">3</a> The holder’s basis is increased by the amount of original issue discount (OID) actually included in income each year.<a href="#_ftn4" name="_ftnref4">4</a> However, if the obligation was originally issued before July 2, 1982, the amount of discount is not includable in income until it is received on sale or maturity of the obligation (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7632">7632</a>).<a href="#_ftn5" name="_ftnref5">5</a> (3) Market discount accrued during the year on notes and bonds (acquired in tax years ending after July 18, 1984) must be included in income if an election to include market discount is in effect (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7644">7644</a>). (4) If the holder purchased the bond at a premium, the holder may elect to amortize the premium and reduce basis accordingly (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7654">7654</a>). For tax on the sale or exchange of a Treasury bond or note, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7632">7632</a>. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. §§ 1.61-7, 1.451-2(b); Lavery v. Comm., 158 F.2d 859 (7th Cir. 1946); Obland v. U.S., 67-2 USTC ¶ 9751 (E.D. Mo. 1967). <a href="#_ftnref2" name="_ftn2">2</a>.   L.A. Thompson Scenic Ry. Co. v. Comm., 9 BTA 1203 (1928); Rev. Rul. 69-263, 1969-1 CB 197. <a href="#_ftnref3" name="_ftn3">3</a>.   IRC § 1273(a). <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 1272(d). <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 1271(b); Treas. Reg. § 1.67-7(c). </div></div>

March 13, 2024

7632 / How are the proceeds taxed on the sale or redemption of Treasury notes and bonds?

<div class="Section1">On sale or redemption at maturity of Treasury notes and bonds, the proceeds must be separated into identifiable components for tax purposes.<div class="Section1"> (1) If the sale occurs between interest dates, as it generally does, the seller usually receives from the buyer an amount stated separately from the purchase price representing stated interest accrued to the date of sale, but not yet due. This is reported by the seller as interest income, not gain.<a href="#_ftn1" name="_ftnref1">1</a> (2) Out of the proceeds (other than interest, discussed above) an amount equal to the taxpayer’s adjusted basis in the note or bond and expenses of sale is recovered tax-free.<a href="#_ftn2" name="_ftnref2">2</a> The taxpayer’s basis is generally the cost of acquisition adjusted by (i) adding any original issue discount (OID) and market discount included in income as it accrued,<a href="#_ftn3" name="_ftnref3">3</a> or (ii) subtracting the amount of premium deductible or applied to reduce interest payments over the period the taxpayer held the bond if he or she elected to amortize the premium (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7644">7644</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7650">7650</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7654">7654</a>).<a href="#_ftn4" name="_ftnref4">4</a> (3) As a general rule, amounts in excess of (1) and (2) are treated as capital gain (long-term or short-term, depending on the holding period and the date of acquisition). See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="699">699</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a> for more information on the calculation of holding periods and the treatment of capital gains and losses. However, in the following special circumstances part or all of the gain must be treated as ordinary income: (a) If the note or bond was issued after July 18, 1984, or if the note or bond was issued on or before July 18, 1984, and was purchased on the market after April 30, 1993, gain equal to market discount accrued up to the date of disposition and not previously included in income is treated as interest income, not capital gain (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7645">7645</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7647">7647</a>).<a href="#_ftn5" name="_ftnref5">5</a> If a bond was issued on or before July 18, 1984, but acquired after that date at a market discount using borrowed funds, a part or all of the gain must be treated as ordinary income to the extent that a deferred interest expense deduction is taken (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8046">8046</a>). (b) If a note or bond originally issued on or before July 1, 1982, and after December 31, 1954, was originally issued at a discount of ¼ of 1 percent (.0025) or more of the stated redemption price multiplied by the number of full years from issue to maturity and the holder did not pay a premium for it, any gain realized must be treated as ordinary income up to a prorated portion of the original issue discount.<a href="#_ftn6" name="_ftnref6">6</a> (The prorated portion is explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7651">7651</a>.) If the seller purchased the note or bond at a premium (i.e., at a price in excess of the face amount of the obligation), none of the gain is original issue discount.<a href="#_ftn7" name="_ftnref7">7</a> A holder is considered to have purchased at a premium if the holder’s basis is the same, in whole or in part, for purposes of determining gain or loss from a sale or exchange as the basis in the hands of another person who purchased at a premium. Thus, for example, a donee is considered to have purchased at a premium if the donor did.<a href="#_ftn8" name="_ftnref8">8</a> (c) With respect to bonds issued before January 1, 1955, the IRC did not deal with the problem of original issue discount. Despite this, the Supreme Court has ruled that under the pre-1954 Code, original issue discount “serves the same function as stated interest” and “earned original issue discount, like stated interest, should be taxed … as ordinary income” when realized.<a href="#_ftn9" name="_ftnref9">9</a> However, gain or loss from retirement of a bond is capital gain or loss only if the bond was issued with coupons attached or in registered form or was in such form on March 1, 1954.<a href="#_ftn10" name="_ftnref10">10</a> (4) If there was no gain, the loss is treated as a capital loss (long-term or short-term, depending on the length of the holding period (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="699">699</a>)). If “substantially identical” obligations were acquired (or a contract to acquire them was made) within 30 days before or 30 days after the sale, the loss will be subject to the “wash sale” rule discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7537">7537</a>. If the sale is made to a related person, the loss deduction may be disallowed (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="701">701</a>). If a Treasury bond or note was held as part of a tax straddle, the additional rules and qualifications explained in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7593">7593</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7614">7614</a> apply; if the bond or note was held as part of a conversion transaction, the additional rules discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7615">7615</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7616">7616</a> will apply. For the rules governing the substitution of newly issued bonds for outstanding bonds, see Revenue Procedure 2001-21.<a href="#_ftn11" name="_ftnref11">11</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.   Treas. Reg. § 1.61-7(d). <a href="#_ftnref2" name="_ftn2">2</a>.   IRC § 1001(a). <a href="#_ftnref3" name="_ftn3">3</a>.   IRC §§ 1272(d), 1276(d)(2), 1278(b)(4); General Explanation–TRA ’84, p. 99. <a href="#_ftnref4" name="_ftn4">4</a>.   IRC § 1016(a)(5). <a href="#_ftnref5" name="_ftn5">5</a>.   IRC § 1276. <a href="#_ftnref6" name="_ftn6">6</a>.   IRC § 1271(c)(2). <a href="#_ftnref7" name="_ftn7">7</a>.   IRC § 1271(a)(2)(B). <a href="#_ftnref8" name="_ftn8">8</a>.   Treas. Reg. § 1.1232-3(d)(2). <a href="#_ftnref9" name="_ftn9">9</a>.   U.S. v. Midland-Ross Corp., 381 U.S. 54 (1965). <a href="#_ftnref10" name="_ftn10">10</a>.   IRC § 1271(c). <a href="#_ftnref11" name="_ftn11">11</a>.   2001-1 CB 742. </div></div>