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TMF Taxes wrote,

<<Thank you for the reply.>>

My pleasure...

<<If I found a bank willing to sell me a 5 year CD that paid all the interest at maturity, why does the tax treatment for this instrument differ from a zero-coupon corporate bond.>>

Because they are completely different animals...and treated completely different for tax purposes. I could go into all of the messy details, but it's just different rules for different financial instruments.

<< I thought that you paid taxes on "imputed interest" each year if you hold a 5-year zero-coupon corporate bond in a taxable account. Am I mistaken?>>

You DO have to realize interest on zeros during the year...regardless of when it pays out. But a zero is a corporat obligation...a bond of some sort...that you are buying at a DISCOUNT. And the rules for bonds purchased at a discount are different than those for simple bank interst earning accounts.


I thought this interpretation of the rules on CD interest were to good to be true. I found this in JK Lasser's:

"According to J.K. Lasser's Your Income Tax 2000, interest that is deferred to maturity on a CD with a term more than one year is consider to be OID. A portion of the OID is reported to you by the issuer as interest income on Form 1099-OID."

I guess that's why banks don't offer 5-yr CDs with all interest paid at maturity -- it doesn't make any difference.


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