How to Calculate Gain or Loss on a Bond Redemption

By Motley Fool Staff – Updated Apr 29, 2025 at 11:00PM

Key Points

Bonds offer predictable cash flows and have fixed repayment dates, differing from stocks.
Bond gains or losses are calculated by subtracting the purchase price from the redemption proceeds.
Understanding bond redemptions and tax implications is crucial for effective investment planning.
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Bonds don't get as much attention in the investing world as stocks do, but they play an equally important function in investment portfolios. The predictable cash flows that bonds offer stand in stark contrast to the uncertain returns of stocks. Bonds have fixed dates on which the issuer can pay back the principal amount it owes, and when that happens, bondholders have to be prepared for the tax consequences. Below, we'll look more closely at how bond redemptions get taxed and how to calculate gain or loss.

A fanned pile of hundred dollar bills lying atop Treasury bonds.

Image source: Getty Images.

Two kinds of bond redemptions

Bonds get paid back in two different ways. The most common is when a bond matures naturally. Every bond has a specified maturity date on which the bond issuer must repay the face value of the bond. On the date, bondholders have their bonds redeemed and receive a final cash payment.

The other type of bond redemption occurs before the stated maturity date. Some bonds have specific call provisions that allow the issuer to redeem the bond at specified dates prior to maturity at a stated price, which can be the same as or different from the bond's face value. In addition, companies sometimes do tender offers to buy back bonds on the open market, and when that happens, selling bondholders have their bonds redeemed in exchange for the agreed-upon payment.

Calculating gain or loss

In many cases, calculating the gain or loss on a bond redemption is fairly simple. If you take the redemption proceeds and subtract what you originally paid for the bond, then the difference will tell you the answer. If it's positive, then you have a gain. If it's negative, you've lost money on the bond.

Complicating the issue is that, in some cases, your tax basis will be different from what you paid for the bond. For example, in bonds with what's known as the original issue discount, the bondholder must claim a portion of the discount as taxable income each year. That income increases the tax basis in the bond, reducing the eventual gain upon redemption. In general, taking what you got in the redemption transaction and subtracting the cost basis will give you your gain or loss.