Author Topic: Tax Implications of heavy buying and selling on Folio...will this cause a..  (Read 8270 times)

TheReaper

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Are individual loans not treated the same as individual stocks?

No.  Bonds bought for a price other than par are indeed different.

The things you buy from LC are "notes", which are categorized as bonds by the IRS.  Read the rules for bonds at irs.gov  They are quite complex.  You must adjust the basis (ie what you paid for the bond) by adding in amortization.

History: Back in the 80's, after interest rates went way up, there were a lot of bonds selling for much less than par.  You could buy these bonds and just hold them, and then at maturity you would get a bunch of capital gain, which of course is favorably taxed.  The IRS decided this was a loophole.  To fix it they made rules that say if you buy a bond above or below par, you have to calculate an adjustment to the basis every year, and for bonds bought below par, have to treat some of the price rise as ordinary income each year.  This requires you to do a calculation for each bond.

Read IRS Pub 550 titled "investment income"
https://www.irs.gov/pub/irs-pdf/p550.pdf


Starting on page 15 is a section titled "Market Discount Bonds", by which they mean bonds that you have bought in a secondary market (ie folio) for less than par (which is what most of you are buying on folio).

You are required to accrue the market discount, and take a piece of it every year as INTEREST INCOME, and correspondingly increase your basis, so that when you sell, you pay less capital gain than you would have. 

Bonds bought above par have a different set of rules.

At the very least, you will need a big spreadsheet, containing all the bonds you hold during the tax year, calculating the accrual on each and summing them up.

GEE Whiz, I sure hope the others are correct about Turbo Tax....I suspect they are.  Otherwise, my tax return would cost thousands at HR Block..they love to line itemize charge.  Thanks to everyone for their responses.  I appreciate the time taken.

dla

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Re: Tax Implications of heavy buying and selling on Folio...will this cause a..
« Reply #16 on: February 06, 2017, 12:31:20 PM »
I am not an accountant, but I believe it's fairly simple to report market discount IF you make an election to report it on purchase.  The big advantage here is that you don't have to do any complicated calculations, just add up the discount you paid in a year and pay taxes on it.  The disadvantage is that you pay taxes on the discount before you get the benefit.  But over the term of the loan it all evens out.

See below, "Choosing to include market discount in income currently".

https://taxmap.ntis.gov/taxmap/pubs/p550-003.htm

Market premium is another matter, but I don't purchase notes at a premium in my taxable accounts.

jpildis

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Re: Tax Implications of heavy buying and selling on Folio...will this cause a..
« Reply #17 on: February 06, 2017, 06:45:32 PM »
If you really want to be confused / inspired, look at the Contingent Payment Debt Instruments section of this publication:

https://www.irs.gov/publications/p1212/ar02.html

Specifically, the rules on how to account for losses and gains as a result of a sale.

elumbra

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Re: Tax Implications of heavy buying and selling on Folio...will this cause a..
« Reply #18 on: February 23, 2017, 02:12:23 PM »
Tax year 2015 and 2016 were easy to do with Turbo Tax sync.  However, I hate that Turbo Tax is set up for people that are completely uninterested in their taxes and makes it difficult if not impossible to review your tax documents as your doing them.  I'm currently below median AGI and am at very low risk of audit so I will take the risk that my taxes are off by a bit.  But in the future as my income and audit risk goes up I plan on paying a professional whom I can go over the paperwork with. 

Fred93

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Re: Tax Implications of heavy buying and selling on Folio...will this cause a..
« Reply #19 on: February 23, 2017, 03:59:53 PM »
Tax year 2015 and 2016 were easy to do with Turbo Tax sync.  However, I hate that Turbo Tax is set up for people that are completely uninterested in their taxes and makes it difficult if not impossible to review your tax documents as your doing them.

In TurboTax, you can go to forms at any time.  Its one of the wonderful things about TT.