Form 1099-B and the new adjusted tax basis and sales proceeds reporting rules for brokers.

• Author: Almeras, Jon

On April 17, 2013, the IRS released final and temporary regulations (T.D. 9616) that provide guidance on the requirement of Sec. 6045 for brokers to report proceeds and adjusted tax basis for the sale or exchange of certain debt instruments, securities futures contracts, and options on Form 1099-B. Proceeds From Broker and Barter Exchange Transactions. Reporting under the regulations applies to certain debt instruments Ide-scribed below) acquired on or after Jan. 1. 2014. The taxation of debt instruments is complex, but given the new reporting requirements, this is a good time to consider the topic. This item focuses on the general taxation of debt instruments and provides an overview of the new reporting requirements and the implications they raise.

General Tax Issues of Debt Instruments

Since the financial crisis of the late 2000s, transactions in debt instruments have increased in volume and complexity. From a tax accounting perspective, taxpayers and their advisers generally must consider two major categories of debt investments: ( 11 original issue and (2) secondary market purchases. FLach category requires further examination of the facts and circumstances at the time of purchase, in addition to the terms of the instrument.

Original Issue Debt Instruments

An original issue debt instrument may be issued in one of three ways: below par with original issue discount (00) (Secs. 1272 and 1273), at par without OID, or at a premium without Oil). Oil) is the difference between the issue price of a bond and the amount payable to the holder when the debt instrument matures (known as the stated redemption price at maturity, or SRPM). SRPM is the sum of all payments under the deht instrument that are not qualified stated interest (QSI), i.e., interest that is unconditionally payable in cash or in property (other than debt instruments of the issuer) or that will be constructively received under Sec. 451, at least annually at a single fixed rate (Regs. Sec. 1.1273-l(c)).

If all stated interest is QSI, then the SRPM is simply the principal amount of the debt. All debt instruments that pay no interest before maturity are presumed to be issued with OID, e.g., zero-coupon bonds. In other words. Oil) is SRPM less issue price. If the debt instrument is issued with OID. taxpayers should include in their gross income the appropriate amount of accreted OID in "an amount equal to the sum of the daily portions of the original issue discount for each day during the taxable year on which such holder held such debt instrument" (Sec. 1272(a)(1)).

If an original issue debt instrument is issued at a premium, the holder may elect to amortize the premium under Regs. Sec. 1.171 -1 (a) on an effective-vie Id basis as an offset to interest income over the term of the debt. The amortizablc premium is equal to the excess of ( 1 ) the holder's basis in the debt insrriunenr when purchased at original issue over (2) the SRPM. The election applies to all of the holder's taxable premium debt instruments for the current and subsequent years, unless revoked with the IRS's consent.

Upon disposition of an original issue debt instrument, the taxable gain or loss realized is generally the sale price of the debt instrument (or the redemption price if the bond is...