Swapping Bonds to Claim Losses

Taxpayers holding bonds that have decreased in value may benefit from a technique known as a bond swap. A bond swap enables a taxpayer to currently benefit from the decline in a bond’s value and either increase or keep the same cash flow generated by the bond. To facilitate a bond swap, the taxpayer sells currently owned bonds at a loss and immediately reinvests the proceeds in different bonds. This technique is beneficial if the taxpayer has current capital gains, particularly short-term, that can be offset by the bond’s capital loss, or the taxpayer’s overall net capital loss following the bond disposition is $3,000 or less (which the taxpayer can offset with other ordinary income).

Taxpayers entering into bond swaps must steer clear of the wash sale rule to avoid having the loss from the disposition disallowed. If the replacement bond is purchased within 30 days before or after the sale of the old bond, it cannot be substantially identical to the original bond. Bonds issued by a different entity would not be substantially identical to the old bond. Bonds of the same issuer would not be substantially identical if they have coupon rates or terms different from those of the original bonds, provided such differences are not negligible. Also, the transaction charges (for example, brokerage commissions) associated with buying and selling bonds will reduce the economic benefit of a bond swap.

Please contact Martini, Iosue & Akpovi by phone at (818) 789-1179 if you have any questions or would like more information.


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