Tax Help: Is a loss on the sale of a municipal bond deductible? (2024)

FAQs

Is loss on sale of municipal bonds deductible? ›

While interest on municipal bonds is tax free for federal income tax purposes, gain or loss on the sale of the bonds must be reported. The loss is treated as a capital loss, which is deductible within capital loss rules. This means the capital loss can fully offset capital gains.

You can offset long-term gains with long-term losses and short-term gains with short-term losses. Second, if your losses exceed your gains, you can apply an additional $3,000 per year to reduce your taxable income for that year.

If you hold onto the bond, then you will have an unrealized capital loss. Capital losses are not deductible until you realize them, just as gains are not taxable until you realize them, so in that case there would be no immediate effect on your taxes.

Municipal Bonds

Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for federal tax purposes. In addition, interest on the bonds is exempt from State of California personal income taxes.

We can use them against active trading gains in the future. So for our active strategies, it makes them more tax efficient when we have these accumulated tax losses to offset future capital gains. It's something we think makes sense broadly for investors across the muni market.

Although profit on selling a rental property might have to be reported as capital gains, losses when selling rental property are deductible from your ordinary income. Learn more about the different types of taxable income on the Internal Revenue Service (IRS) website's page on Capital Gains and Losses.

Losses are only deductible if they are not covered by insurance. For example, during a storm that is declared a federal disaster by the President of the United States, a tree falls on your house. You get an estimate from a contractor who says repairs will cost $5,000.

It is not possible to offset a loss on one bond against a gain on another bond. This means that if there are multiple bond surrenders in one tax year you would ignore the bond with the loss from the calculations.

Capital gains, which are any profit you make from selling a bond before maturity. (Capital losses are also possible.) The tax rate charged will depend on how long you held the bond. If you've held it for less than a year, you'll be charged at your regular income tax rate.

Net capital losses (the amount that total capital losses exceed total capital gains) can only be deducted up to a maximum of $3,000 in a tax year.

Can I offset capital losses against income? ›

Losses made from the sale of capital assets are not allowed to be offset against income, other than in very specific circ*mstances (broadly if you have disposed of qualifying trading company shares). You cannot claim a loss made on the disposal of an asset that is exempt from capital gains tax (CGT).

Bonds are often touted as less risky than stocks—and for the most part, they are—but that does not mean you cannot lose money owning bonds. Bond prices decline when interest rates rise, when the issuer experiences a negative credit event, or as market liquidity dries up.

While the interest income is usually tax-exempt for municipal bonds, capital gains realized from selling a bond are subject to federal and state taxes. The short-term or long-term capital gain, or loss, on a bond sale, is the difference between the selling price of the bond and the original purchase price of the bond.

Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. * You will, however, have to report this income when filing your taxes. Municipal bond income is also usually free from state tax in the state where the bond was issued.

Bonds used to fund local and state government projects like buildings and highways are afforded tax-exempt status at the federal level. Plus, people who purchase bonds issued by their states or localities may not be required to pay state or local taxes on the interest.

If there are excess losses, they can be used to offset up to $3,000 of ordinary income ($1,500 for married persons filing separately), which includes interest on bonds that are not tax-exempt. Any excess loss can be carried forward indefinitely and used in the same manner.

With yields higher than they've been in years, investors actually could sell underperforming bonds, use the proceeds to reinvest in higher-yielding bonds and then harvest the tax losses from the initial sale.

Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.