Government Bonds Issued at a Discount

Government Bonds Issued at a Discount

Certain U.S. Government bonds (Series E and EE) are issued at a discount and do not pay interest during the life of the bond. Instead, the bonds are redeemable at increasing fixed amounts. Thus, the difference between the purchase price and the amount received upon redemption represents interest income to the holder. A cash-basis taxpayer may defer recognition of taxable income until such bonds are redeemed or until the year of final maturity, whichever is earlier. Alternatively, the taxpayer may elect to include the annual increase in the value of the bond in gross income on an annual basis.