Instructions

Understand the tax status of municipal bond earnings. Although interest income is tax-free, capital gains resulting from appreciation in the price of the bonds are subject to federal income taxes. If the bonds are held for more than a year, profits from their sale are considered long-term capital gains. Any capital losses are used to offset other capital gains earnings, and any remaining loss can be deducted against regular income.

Use the cost basis of a municipal bond to calculate net capital gain or loss. Suppose the sale price of the bond in Step 2 is $5,100. The capital gain for tax purposes is $5,100 minus $4,700, or $400.

References

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