Bond Swapping

Bond Swapping is a very handy bond investing technique. One of the key reasons why investors may want to swap bonds is to generate current tax losses. But, there are many things to consider in bond swapping.

What is bond swapping?

Bond swapping is a bond investing technique that bond investors use for reasons which we discuss below. To swap bonds, the bond investor would sell his or her existing bonds and buy other bonds that are better for his investment portfolios.

What is the purpose of bond swapping?

Bond investors swap bonds for various purposes. Below are key reasons why investors swap bonds.

• to generate current tax losses
• to improve bond yields or quality
• to change the maturity of their bonds in the portfolio

How to generate current tax losses with a bond swap?

For bond investors to create a tax loss situation with a bond swap, the investor must sell the bonds he or she holds at a loss and buy similar bonds. Plenty of research should be put into finding appropriate bonds for bond swapping. Bear in mind that if the bond swapping is not legitimate, the IRS could classify the bond swap as a wash sale and would disallow the tax loss. The IRS would consider a bond swap a wash sale if the new swapped bonds are different from the old ones in two of three ways; issuer, maturity date or coupon. See the Wash Sale section of the All About Bonds website.