Cd - ltcg

[Hyper]

When you have CD over 1yr in maturity but the CD pay quarterly, semi annually or at maturity over a yr, but you do not receive any interest until maturity, why is it not considered LTCG? TIA

 

[SecondCor521]

Because it's a term-certain deposit account, not an investment purchase. I don't know if it's relevant as to why, but in an investment situation there is the risk of loss; in the case of a CD there isn't any risk of any nominal loss (you could lose to inflation).

 

[njhowie]

When you have CD over 1yr in maturity but the CD pay quarterly, semi annually or at maturity over a yr, but you do not receive any interest until maturity, why is it not considered LTCG? TIA

You can think of it the same as any other investment (specifically a bond) it's no different.

While you own it, the periodic payments during the year are interest payments. At maturity, you may have a long term capital gain or loss depending how much you paid. Most folks are buying new/original issue CDs. You pay $1000 face value and you get back that $1000 at maturity - no gain or loss.

Now, CDs may also be purchased or sold in the secondary market. In this case, there may be capital gains or losses when sold or at maturity since you may get back more or less than the original purchase price.

 

[pb4uski]

Theoretically, because there is no money at risk of loss... it is an interest bearing instrument with no credit risk.

 

[njhowie]

Theoretically, because there is no money at risk of loss... it is an interest bearing instrument with no credit risk.

https://finance.zacks.com/certificate-deposit-capital-asset-7862.html

 

[pb4uski]

Given the wording in the OP, I presume that the OP was talking about a bank CD, not a brokered CD.

 

[Hyper]

Thank you. I understand now why bank CD's are not considered LTCG. Why the statement about bank or brokered? I read the article but didn't see a difference. Are brokered CD considered LTCG?

 

[gindie]

Thank you. I understand now why bank CD's are not considered LTCG. Why the statement about bank or brokered? I read the article but didn't see a difference. Are brokered CD considered LTCG?

The Brokered CD is what is described in the "Secondary Market" section of the article. Most of the CD's you see advertised aren't of that type.

The buying/selling of "Secondary Market" CD's could trigger a capital gain or loss.

 

[bingybear]

If you buy a CD on a secondary market, you could end up with LTCG. However, the interest will paid on the CD will still be ordinary income.

 

[audreyh1]

You can think of it the same as any other investment (specifically a bond) it's no different.

While you own it, the periodic payments during the year are interest payments. At maturity, you may have a long term capital gain or loss depending how much you paid. Most folks are buying new/original issue CDs. You pay $1000 face value and you get back that $1000 at maturity - no gain or loss.

Now, CDs may also be purchased or sold in the secondary market. In this case, there may be capital gains or losses when sold or at maturity since you may get back more or less than the original purchase price.

If you buy a CD at a discount on the secondary market, and then get back a higher value at maturity, is that difference considered a capital gain?

If you buy t-bills which are always at a discount, the difference at maturity is your interest payment, right?

 

[bingybear]

In the past I bought muni bonds in the secondary market. I think CDs on the secondary market are similar to these without the tax exempt income. I believe this is all covered in Pub 1212. I think you have to take into account an OID based on your purchase in the secondary market in addition to the interest. You also get to calculate gain and loss if I recall considering OID. This has been many years since I messed with buying bonds on the secondary market and my dementia may be talking. Do your own due diligence.

 

[pb4uski]

I think the tax treatment would be similar to the tax treatment of secondary market bonds bought at a premium or a discount in Publication 550.

OID doesn't apply since they are not original issue.