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Oddities with Treasury securities

elorimer

I know there are various ways of doing this, but there are some odd things that go along with buying Treasuries at a discount or with accrued interest. This is with Fidelity

For Tbills, a downloaded purchase is at the discounted price, and the downloaded redemption is at par. For these, I enter interest income of the difference, and a return of capital for the same amount. This keeps the redemption out of capital gains and puts it in interest. Quicken will not allow you to enter a negative return of capital at the register; you have to edit the transaction.
Tbills are sometimes not using unique CUSIPS. That is, if you invest in a six month Tbill, and then in three months invest in a three month Tbill, you will get a CUSIP that is the same as the six month Tbill. So now you have two lots. There is no way to follow method #1 above by lot; Quicken does an allocation and then rounds, so you end up with two slightly different numbers in a capital gains report, one red and one black that are out of sync by one or two cents, depending on the rounding.
For securities that you buy with accrued interest because the auction is reopened, Quicken treats the accrued interest as an expense, which is of course wrong. It should really be treated as an increase in the basis, followed by a return of capital at the next interest payment date and a reduction of interest paid (this is, in effect, the opposite of #1). But you can end up with the same problem as #2.

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Comments

NotACPA

input the Interest txn and a SALE of the TBill for the original purchase amount. No ROC needed as you're disposing of the security via maturity.
Those 2 TBills, if I'm reading you correctly,have the same maturity date … they ARE the same security. Q is handling the CUSIP properly.
Sorry, but you're wrong about the interest. It IS an expense. The basis is what you owe for the principal of the bond, and that's what determines Cap Gain/Loss when you dispose of it. In addition, there's any interest you receive over the holding period. Say, on purchase, you pay $100 in accrued interest to the seller and later that period you receive $250. Do you REALLY want to report $250 in interest to the IRS … or only $150?

Tom Young

@NotACPA

As to #3, Quicken's treatment of accrued interest is in error for a couple of reasons but mainly, as to the interest paid. it's not a period expense. So purchasing a T-Bill in one period (month, quarter, whatever) that matures in a later period distorts what's really going on. To use your example, you'd show $100 of interest expense in one period and then sometimes later you'd show interest income of $250. Yeah, it nets out but you didn't really incur an expense of $100 in one period and the get income of $250 in a later period.

The interest you pay really is a "receivable", a balance sheet item, not an expense. In the few times I've bought a bond and paid interest I've used a pseudo-security of "Accrued Interest" and "bought" that "security with the money I paid the bondholder I bought the bond from. Then, sometime later, again using your example, the $250 received at maturity would be recorded as a $100 "sale" of the Accrued Interest "security" and $150 of interest income. No phantom expense when purchased, no phantom income when matured.

NotACPA

Obviously I hadn't thought about this enough (I don't buy bonds). A Receivable DOES sound like the preferable process.

elorimer

https://community.quicken.com/discussion/comment/20443601#Comment_20443601

Yes, but doesn't this come out the same as adding the accrued interest to the basis, and then recording it as a return of capital at the first interest payment date?

elorimer

On the two Tbills point, yes, they are the same security and the CUSIP is being handled properly. The problem is that you have two lots of the same security, and Quicken doesn't treat a return of capital correctly. If you have $0.15 of return of capital on the security, it divides it into $0.075 for each lot, and then it is rounded up and down, so you don't show $0.15 of return of capital in the capital gain reports.

Also, if you record a sale of a security and a return of capital of a security on the same date, you have to fool Quicken by recording the return of capital the prior day; Quicken doesn't take the return of capital into account in reporting capital gain or loss when it shows in the register after the sale (but on the same date).

Tom Young

@elorimer

Your process of adding the accrued interest to the basis and then creating a RtrnCap transaction at the first interest date should work too, except for the inability to steer the RtrnCap transaction to the correct bond. Creating a pseudo-security of "Accrued Interest" (maybe with a name of the bond attached) would overcome that problem with the RtrnCap Action and the "same day sale" situation.

q_lurker

@elorimer Seems to me the gist of your 'oddities' is your use of RtrnCap transactions. By the way, your points are not limited to US Treasury securities; they really apply to a broad range of bonds.

RtrnCaps are not necessary in your #1. Sell at cost and record the balance of the proceeds as interest received.

RtrnCaps do not work in your #2 with multiple lots. See #1.

In #3, you wrote about accrued interest paid upon purchase that "it should really be treated as an increase in the basis, followed by a return of capital at the next interest payment date …". I am not clear why you think that should be the case. My FI's do not show an increase in the basis for the accrued interest paid at purchase of a bond. I am not going to argue with @Tom Young about the 'right' way to do it - he is smarter on such matters that I am.

I will say I accept Quicken's approach of using a MiscExp transaction though I tie it to the regular _IntInc or _IntIncTaxFree category rather than the _Accrued… variation. Both _IntInc and _Accrued Int map to the same tax line, even though the accrued version is set up as an Expense rather than an Income. I take that approach just to make cross-checking with the 1099 data easier. Upon further review, I also noted that through 2011, I used an IntInc action (not a MiscExp action) for the 'negative' interest associated with the accrued interest. Not sure what took place in 2012 that casued me to change my ways.

As to Tom's concern about working across different periods, I have only been concerned about that at year-end. For example, if I buy the bond in October with the $100 accrued interest outlay and receive the full semiannual interest of $250 in January of the following year, I use two adjusting transactions to negate the 'negative' October interest and transfer it to the following year. One +interest of $100 on 12/31 and a 'negative' $100 interest on 1/1. That seems to keep Quicken consistent with my tax records.