Taxes on Tax-Exempt Bonds

64 Pages Posted: 25 Mar 2008

See all articles by Andrew Ang

Andrew Ang

BlackRock, Inc

Vineer Bhansali

LongTail Alpha, LLC

Yuhang Xing

Rice University

Multiple version iconThere are 4 versions of this paper

Date Written: May 14, 2007


Individuals must pay tax on the secondary market transactions of tax-exempt bonds. The profits involving changes in bond prices are taxed either as income or as a capital gain. We find that municipal bonds carrying market discount, which are subject to income tax, command higher yields than municipal bonds not subject to taxes arising from secondary market trades. However, the after-tax yields on municipal bonds with market discount are around 30 basis points higher than yields on comparable municipal securities not subject to market discount taxation. We estimate an implied tax rate of around 80% using trades of municipal bonds entering regions where income tax rates apply.

Keywords: municipal bonds, income and capital gains tax, de minimis boundary, public finance

JEL Classification: G12, G28, H20, H24

Suggested Citation

Ang, Andrew and Bhansali, Vineer and Xing, Yuhang, Taxes on Tax-Exempt Bonds (May 14, 2007). Available at SSRN: or

Andrew Ang (Contact Author)

BlackRock, Inc ( email )

55 East 52nd Street
New York City, NY 10055
United States

Vineer Bhansali

LongTail Alpha, LLC ( email )

500 Newport Center Drive
Suite 820
Newport Beach, CA 92660
United States

Yuhang Xing

Rice University ( email )

6100 South Main Street
Houston, TX 7705-1892
United States

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