Many tax preparers these days are in the process of amending their clients' tax returns under the recent voluntary disclosure program for offshore financial accounts. If their clients have invested in offshore bearer bonds, it is important to understand certain special rules that apply to these bearer bonds.
Under Code § 165(j), no deduction is allowed for losses sustained on bearer bonds. For instance, if a bearer bond is purchased and later resold at a loss, no deduction would be allowed for U.S. tax purposes. This is quite an unusual rule and many tax preparers may not be aware of it.
In addition, Code § 1287 denies capital gain treatment for gains on bearer bonds. For instance, if a bearer bond is purchased and later resold at a gain, the gain would be taxed as ordinary income.
If your clients have been investing in bonds through their foreign financial accounts, it is important to determine whether the bonds were bearer bonds.