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Author: knepley Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121563  
Subject: Tax on municipal bond sales Date: 8/3/1999 2:06 PM
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About 10 years ago my wife invested in a number of municipal bonds (state exempt). Some were zero coupon and some not. My understanding is zero coupon are purchased at a discount price to face value & pay no interest - your "interest" is the difference between what you paid and what you get when you sell. The regular (non zero) bonds are purchased at a nominal face value and pay a semiannual interest payment. When you sell - if the bond market is the same as when you bought, the capital gain is a wash. (Sorry for the tutorial - I'm trying to check my own understanding here.)

These bonds start maturing next year (zero's 1st) at the rate of one per year. Next year I may need about 25% of the bond's total market value and I'm considering liquidating some of the bonds rather than my equity holdings if it's taxwise advantageous (taxable account).

My Question (about time you say - I agree), what are the capital gain implications of selling either a zero or non-zero before its maturity date in light of the fact that these are muni's? My understanding is that if I held them until they mature there is no capital gain because they are muni's. But for an early sale? Am I still exempt from capital gain tax?

Thanks for helping this newbie.
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