Jeffrey G bought 6.5% debentures at 95 with 10 years to maturity. In 5 years the bond price has risen to 97. If he were to sell his bonds at 97, which of the following is the MOST likely tax consequence in the year of the sale?

Explanations

The bonds were purchased for $950. They mature in 10 years at par value ($1,000). The $50 discount is accreted over 10 years at $5 per year. 5 years at $5 per year is $25. Now, his cost basis is $975. He sold the bonds at $970, so for tax purposes, he lost $5 per bond. The question asks for the tax consequence in the year of the sale