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[I]f you consistently buy your bonds above par, you can book an essentially meaningless loss at maturity. The effective yield to maturity tends to be the same, dollar for dollar, for an above par bond as it is for one sold below par. Unless I'm mistaken on the tax code, you should then be able to use such per "losses" to offset any capital gains

Actually, the tax advantages are minimal, and you are better off amortizing the premium instead of taking the capital loss.

Just to clarify a point here (I used to deal with this way too much at my old job), if you purchase a municipal bond at a premium, you have to amortize the amount of the premium until maturity. You would reduce your tax-exempt interest each year by the amount amortized. This shouldn't effect your taxable income in most situations, but it does mean that if you hold to maturity, you will have neither a gain nor a loss.

If you purchase a taxable bond at a premium, you have the choice of either A) amortizing your premium each year, and reducing your taxable income by that amount, or B) not amortizing, and taking the capital loss on maturity. You'd rather take an ordinary loss now, instead of taking a capital loss later.

If you purchase a bond at a discount (not an OID bond), and hold to maturity, that amount of discount will be considered to be additional income, NOT capital gain. IIRC, you can either recgonize that each year, or recognize it all upon maturity.

OID bonds must have that discount recognized each year until maturity, as I'm sure most of you know.

The Tax Strategies Board has more information on these issues, and they're covered in sections 1271 thru 1278 or so of the Internal Revenue Code, for all the tax geeks out there.

hope this is helpful,


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