US I-bonds and deferred bond interest
Posting in case others are looking for a way to handle I-Bonds, or other bonds with tax-deferred interest - or in case anyone sees a drawback to my method that I’m not seeing.
[Background: The way these bonds work is a little weird. The interest is calculated monthly, and compounded to the principal twice yearly - but, unless you choose to pro-actively pay it ‘early’, tax on the interest is not due until you cash in the bonds or they mature - at which time the change in value is counted as regular interest earned in the year you cash in the bonds or they mature.]
I started to use netr@cer’s method, but I didn’t enjoy having to enter all the monthly interest transactions manually, and I didn’t like how it ‘lost’ the fact that tax would be due eventually, so I decided to go with something simpler.
I set up a security for the bonds with a $1 price at purchase time and then, instead of tracking interest monthly, periodically change the current price of the security to account for the change in value of the bond, including accumulated interest.
So, say I purchase $10,000 worth of I-bonds: I set up a new security with a price of $1 and record my buy as 10,000 shares at price $1. Every so often I update the security price to match the current ‘value’ of the bond with its accumulated interest - so say it's risen to $10,080, I change the security’s price from $1 to $1.008 (10,080 / 10000).
This causes Moneydance to represent the accumulated interest as an ‘unrealized gain’ - which sort of fits how the value ‘really works’ better than treating it as interest or reinvested dividends, at least to me. It loses the monthly interest transactions, but that’s fine with me. I don’t think there will be problems with the accounting at sale time?...
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1 Posted by Stuart Beesley ... on 19 Feb, 2025 05:19 PM
👍
2 Posted by dwg on 19 Feb, 2025 10:06 PM
The taxation treatment sounds like handling it as a capital gain is the better approach to take, especially if you only get taxed when the bond matures.
3 Posted by bheck11 on 24 Feb, 2025 05:48 AM
For what it's worth, I've taken a "capital gains" approach as well. But in my case, I just recorded the bond at purchase price, then periodically update bond prices per the Savings Bond Wizard program eons ago and now the calculator on the Treasury Direct website. In other words, the value of the bond starts at, say, $1000 (or whatever price) at the time of purchase; future values for that bond are the purchase price + accumulated interest.
SBs are exempt from state and local taxes; federal tax is due only when the bond is sold. If, like @jamie, I needed to know the annual or semiannual interest amount, I could back compute that from the price history. (But I'm never that ambitious....)