There are two ways you can make money when you invest in the negotiable bonds sold by governments and corporations. First, the bond earns interest, which is why most investors buy bonds. However, bond prices fluctuate as they are traded on the bond market. This means you can realize a capital gain if you sell a bond for a higher price than you paid. You will also realize a gain if you bought the bond at a discount and hold it until it matures, at which point the bond issuer must redeem it for the full face value.
Figure your cost basis. Cost basis consists of the purchase price of the bond plus any other expenses such as brokerage fees. Suppose you bought a bond at a price of $800. You paid $20 in fees when you made the purchase and another $20 when you sold the bond. Your cost basis equals $840.
Subtract the cost basis from the total proceeds of the sale to find your capital gain. If you sell the bond for $950 and your cost basis is $840, you realize a capital gain of $110. If the cost basis is greater than the proceeds from the sale, you will get a negative number. This means you have a loss instead of a gain. If you hold a bond until it matures, you calculate gain or loss the same way. Substitute the redemption price for a sale price.
Make a note of the purchase date and the sale date. These dates determine the tax rate on your gain. If you owned the bond for a year and a day or longer, you have a long-term capital gain and the maximum tax rate is 15 percent. If you held the bond for a year or less, your gain is short term and is taxed at ordinary tax rates, with a maximum rate of 35 percent as of the time of publication.
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