Re: note taxes question - Posted by Bob Smith
Posted by Bob Smith on March 31, 2006 at 16:41:59:
Am I right about reporting interest payment? Reporting them on Schedule A as investment interest rather than business interest is seriously awful, because it makes your interest deduction subject to AMT rules and deduction phaseouts.
From Publication 550, Page 15: “When you buy a market discount bond, you can choose to accrue the market discount over the period you own the bond and include it in your income currently as interest income. If you do not make this choice, the following rules generally apply: You must treat any gain when you dispose of the bond as ordinary interest income, up to the amount of the accrued market discount”
From Publication 550, Page 49: “Treat your gain or loss on the sale, redemption, or retirement of a bond or other debt instrument originally issued at a discount or bought at a discount as capital gain or loss, except as explained in the following discussions.”
Since I, like most note buyers, choose to accrue the discount using the constant yield method, the clause noted above from page 15 doesn’t apply. I conclude that means any amount received in a redemption or retirement must be capital gain, long or short depending on my hold period.