About MBS/ABS
Tax Status of ABS
Generally, only the interest portion of payments to ABS investors is subject to income tax—state and local (if applicable), as well as federal. The portion of the payments that represents return of principal or original cost is not taxable.
However, if the securities were purchased at an original-issue discount or a market discount, different rules apply. In the first case, if an investor buys an asset-backed security when it is issued for a price that represents a discount from its face value, the investor may be taxed on the discount that accrues on the security before the investor actually receives it. In the second case, if the security was purchased at a discount in the secondary market, the investor may be subject to a tax on the accrued market discount as principal payments are received on the security, as well as on the interest payments.
Foreign Withholding
Generally, an individual who is not subject to U.S. taxation who purchases an ABS issued by a U.S. issuer would not be subject to U.S. withholding tax to the extent that the security qualifies for the portfolio interest exemption and also qualifies as a debt security for U.S. tax purposes. (Some ABS are, for certain technical reasons, deemed by the Internal Revenue Service to be equity securities rather than debt securities.) Payments on securities that are not treated as debt for tax purposes would likely be subject to U.S. withholding taxes.
In this, as in all other tax-related matters, investors should consult a tax professional for advice about their specific situations.
All information and opinions contained in this publication were produced by the Securities Industry and Financial Markets Association from our membership and other sources believed by the Association to be accurate and reliable. By providing this general information, the Securities Industry and Financial Markets Association makes neither a recommendation as to the appropriateness of investing in fixed-income securities nor is it providing any specific investment advice for any particular investor. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and sources may be required to make informed investment decisions.