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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121265  
Subject: Re: OID questions Date: 6/16/2008 3:10 AM
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My understanding is that if I pay tax on an OID one year, and the bond in question gets sold in a subsequent year, I get to adjust my basis up by the amount of the OID. Right?

Correct.

It's better than nothing, but it's a bit of a bummer to pay the first tax at my marginal rate and then get the later benefit at the cap gains rate. Oh, well.

You can talk to Congress about that one. But you are correct.

Second question: If I paid tax on an OID in a previous year and the issue was a convertible bond, and then the bond is converted to stock and the stock is sold, can I still use the OID to increase my basis for the stock sale?

Yes. The basis increases every time you recognize the taxable OID income. Then when you convert the bond to stock, the basis follows over to the stock.

--Peter
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