Redeeming Bonds

Discussion in 'Economics' started by DallasCowboysFan, Nov 3, 2017.

  1. I know I am not the first to think of this.

    But, if you bought bonds for .10 or .20 on the dollar from Puerto Rico or Venezuela.
    And they defaulted or declared bankruptcy, how would that be treated on your tax return?

    Would you declare a $1 loss because that is the redeemable face value?
    Or $2.50 because of the high interest rates on the bond.
    Or would you declare a loss of .10 because that is what you paid?

    Or.......if you paid .30 and Maduro says he will only reimburse you you declare a loss of .20 for taxes?

    It's been a long time since I attended Accounting 101 and 102.
  2. I believe it's just simply based off what you paid. Them not paying interest doesn't get you any extra writeoff I don't think.
  3. Thanks!
  4. Capital gains or losses are based on what you paid vs what you sold for. Just because they go into default doesn't mean the bonds are worth zero - they will still trade and unless there's a bankruptcy process completed, the bonds aren't "worthless" yet. Remember there could be some recovery, at least in principle.

    Any interest you got paid gets reported as such. Any accrued interest you paid to the bond seller (hopefully none given the likely default would have the bonds trading flat), would go as negative interest on your taxes.

    There may be some OID and amortization issues that matter for high discount or high premium bonds, and I am less clear on those. Check with your accountant or tax advisor.
    DallasCowboysFan likes this.

  5. Thanks for your help.......!