The principal and interest components must be in the appropriate minimum or multiple amounts for a security to be reconstituted.
Tax on US Treasury STRIPS | Finance - Zacks
If you have questions about buying, redeeming, or selling STRIPS, contact your financial institution, broker, dealer, or investment advisor. See also 31 CFR If you are from a financial institution, broker, or dealer and have specific questions on the process for stripping or reconstituting Treasury securities, call the Federal Reserve Bank of New York at STRIPS are attractive investments for tax-deferred accounts, such as individual retirement accounts and k plans, and for non-taxable accounts, which include pension funds.
The stripped principal component of a security will be recorded at book value.
Book value is defined as the par value of a security minus the amount of any unamortized discounts or plus the amount of any unamortized premiums. The acronym is clever since these zero coupon bonds are formed by stripping out interest and principal payments of regular Treasury bonds and selling the pieces.
STRIPS are created by brokerages or investment firms, but the resulting pieces of Treasury securities can be registered with and tracked by the U. With a zero coupon Treasury bond, you must pay taxes on the imputed or phantom interest each year. Paying taxes annually does spread the tax bill out over the term of the bond.
However, you do not actually receive interest payments that could be used to pay the taxes. The amount of interest you must claim and pay taxes on a STRIP each year adds to the cost basis of your zero coupon bonds.
Capital gains are taxable and a capital loss can be used as a tax write-off. With a sold STRIP, compare your tax basis calculation with the numbers provided on the from your broker to ensure the gain or loss is accurately calculated. If you hold the bond for more than a year, you can pay tax at the usually lower long term capital gains rate. Interest earned from Treasury securities is exempt from state and local income taxes.
Do not include the interest from your STRIP investments in your taxable income when filing state taxes. The state tax exemption results in a higher after-tax yield from Treasury securities when compared to other, fully taxable bonds.
Minimum Par Amounts
Capital gains tax rates are staying roughly the same for , so if you sell the bond your taxes may not be that different in than they would have been previously. Interest, however, is taxed at the ordinary income rate, and most tax brackets will see lower rates in than in previous years. Conversely, tax rates were generally higher in than in subsequent years.
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