Question

Last year Katie purchased a 9% corporate bond for its par value of $1,000. This year Katie received coupon payments totaling $90. What is the tax consequence for Katie this year, and what is her cost basis at the end of this year?

A. $90 short-term capital gain this year, cost basis $1,000.
B. $90 short-term capital gain this year, cost basis $1,090.
C. $90 ordinary income this year, cost basis $1,000.
D. $90 ordinary income this year, cost basis $1,09

Answer 1

Katie must report the $90 she received from the corporate bond as ordinary income for tax purposes, and her cost basis in the bond remains $1,000 since coupon payments do not alter the initial investment amount.

Step-by-step explanation:

Last year Katie purchased a 9% corporate bond for its par value of $1,000 and this year received coupon payments totaling $90. The tax consequence for Katie this year is that the $90 is considered ordinary income, and her cost basis at the end of the year remains $1,000.

Coupon payments from bonds are treated as income for the year they are received, and are taxed as ordinary income, not as capital gains. Therefore, Katie must report the $90 as income on her tax return for this year. The cost basis of her bond investment does not increase due to receipt of the coupon payments. It remains at the amount she originally paid for the bond, which is $1,000. Hence, when looking at the provided options, the correct answer is C: $90 ordinary income this year, cost basis $1,000.