Investing Tax Free
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Market Discount of Municipal Bonds


These calculations are very complex and tax exempt bonds holders who purchase tax exempt bonds in the secondary market should consult with their brokers and tax advisors to ensure that they have adequate information to properly calculate their tax basis, the amount of original issue discount (OID) and market discount that accrues during the period they hold the tax exempt bonds, and the appropriate amount of gain on sale or maturity.


In many cases, the information supplied on Form-1099 (in the case of a taxable bond) or through IRS Publication 1212 may be insufficient (or inaccurate) in the case of a secondary purchaser of bonds. This will be true with respect to both tax exempt bonds and taxable bonds.


Accordingly, all secondary purchasers of tax exempt bonds should ensure that they fully understand the information that is supplied to them on Forms-1099 (in the case of a taxable bond) or through Publication 1212 (for both taxable and tax exempt bonds) so that they (or their tax advisors) can properly determine the tax consequences of holding or disposing of tax exempt bonds after purchase in the secondary market.


The treatment of market discount as ordinary income applies to tax exempt bonds exempt to tax purchased after April 30, 1993. Thus, if a holder bought a market discount tax exempt bond in the secondary market prior to May 1, 1993, any gain realized on the eventual sale of such tax exempt bond would be treated as capital gains, not ordinary income, whether or not the capital gains were attributable to accrued market discount.

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