Taxes on Bonds - How to calculate

Taxes
1

Dear all,

I’m new (and young) in the Investment field and therefore have some issues to understad the different details related to taxation.
I tried to read different posts such as:

How are zero coupon bonds taxed?

and

Minimising taxes on bond investments

But I don’t get fully the concepts therefore I hope you can provide me a better overview.
Let’s use some examples:

  1. I have some Pounds and therefore considering this Bond XS1859424902 (domiciliate in USA and currency in pounds). How can I see in ICTax the % and the value of tax per year if I buy 1000 Pound?

  2. What if the Bond is NOT in ICTax? is there a rule of thumb I can consider?

  3. Have Corporate bonds and Goverment bonds different taxation criterias?

  4. Is a Zero Coupon Bond taxable for capital gain? Example: one Bond is issued in 2023 at 100, in 2024 goes to 80 and I buy it. The Bond expire in 2025 where will achieve again 100. Will I pay capital gain when the Bond expire?

  5. Same as point 4 but what if the Bond is not a zero coupon? How can I calculate the overall taxation? maybe as an example again XS1859424902

  6. For tax purpose, should I also consider the domicilie of the Bond? Where is the best domicile (Switzlernad and USA only?) If for example, the domicile of the bond is in Italy, should i consider the additional taxation in Italy?

Thank you all for the help. Really appreciated.

ICTax
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2

Rule of thumb is based on following guideline (for Swiss resident perspective)

What is the predominant reason (> 50%) for the returns from bond investment based on emission price and maturity.

  • if the predominant reason is discount on the bond vs par value, then it is considered as Zero coupon bond. For example Treasury bills fall under this category.

  • if the predominant reason is coupon payments then it is considered as standard bond

For zero coupon bonds
taxable income = (Selling price - purchase price) + coupons payments received

For standard bonds
Case 1 -: Taxable income = (redemption price - emission price) + coupons payments received
Case 2 -: taxable income = coupon payments

Case 1 is only applicable if bond is held until maturity

I only covered simple type of bonds. I used above logic to do my own math as I owned some US bonds. There are also other types where coupon payment is variable or something else. Those have more complex rules I think

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3

For US domicile there is no tax withheld at source. For CH domicile, I think 35% is withheld but should be possible to get a tax credit.
For IT domicile - no idea but you need to read the tax treaties. I think the decision of domicile should be based on following

  • ease of buying and selling the bonds
  • least complicated tax situation
  • what is actually available on brokerages and at what costs
  • other costs like stamp duties etc applicable
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4

You can send the ISIN to Ictax and they can add it to the database

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5

Very clear explanation, thanks for all your answers :slight_smile: So I guess a strategy is to buy Bonds with low coupon + discounts and then wait their maturity?

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6

Maybe an additional question: where do you see the Tax value (or the percentage of it) in ICTax?
If i use the Bond XS1859424902 I do not understand where I can see this detail.
Thank you

7

Yeah. Exactly.
I didn’t know about this process before so I also had some T-Bills. Later on, I simply decided to buy regular bonds to avoid Zero coupon style taxation.

In fact most fund managers try to balance the ratio of coupon payments and capital appreciation to get best result for their Bond funds.

If you are interested in the full regulation (in German) , please refer to the following link

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8

I didn’t quite understand the question. But I see all information in ICTAX

An example below

IMG_3491
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9

I’m not a native German speaker but i will definitely have a look and create my own strategy.

10

My question is:
if I purchase this bond for let’s say 1000 £ (as it’s in th screenshot) what is the tax value? 34.79 CHF is the value of the coupon i receivedin that year but not the tax value.
What is the value (money) I have to pay for this Bond every year?

11

I also don’t speak German :wink:
I had to use Deepl to figure out what does this mean because I was trying to fill my tax return properly. Luckily for you your ISIN is in ictax

12

By tax value I think you mean the value as of 31.12.2023 . Right?

It’s also mentioned in screenshot above (994.5 CHF) which would be the Tax value at year end.

1000 in screenshot is not value, it is quantity.
In addition, these bonds are issued at 1000 GBP nominal value which is value you will receive at redemption.

13

yes, but if the Bond or any other products are not there, now i know what to do (thanks to you) :slight_smile:

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14

Yes value as 31.12.2023.
Ah… I weas doing things completely wrong then

So this is the workflow:

  1. understand the nominal value at redemption (e.g. 1000£)
  2. Use ICTax and put the quantities i purchased (e.g. 8) meaning I have invested 8000£
  3. Read the “Tax value for 31.12.2023 in CHF”. That is the taxable value (the percentage depends on my Marginal Rate).

is that correct?

15

I used your example. You also need to enter the date of purchase of bonds to get right numbers. I assumed 1-FEB-2023 in this example

In screenshot you can see, following info

  • What is the value of these bonds on 31.12.2023. this is 7956 CHF . This will be used for wealth tax calculation
  • what is the income from these bonds during 2023, 278 CHF. This will be used for Income tax calculation.

image
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The point is information from ICTax is used as input to finalize tax return. But you cannot conclude the final tax rate based on these numbers. The cantonal software will do it by itself if you enter the numbers properly. If you are based in ZH, then most likely Zurich tax software already has this information embedded. You just need to use ISIN and purchase dates

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16

Now is all clear, thanks