Under the ratable method, the amount of accrued market discount
is equal to the product of the total market discount and the ratio of days held to the total days between the acquisition and disposition date to the maturity date.
8) For electing taxpayers, inclusion of accrued market discount
triggers a basis increase to prevent double taxation on realization of earlier included accrued discount.
The proposed regulations provide two exceptions to this rule: (1) The broker must assume the customer has elected to use a constant interest rate to determine the amount of accrued market discount
, and (2) the broker must assume that the customer has elected to amortize the bond premium.
It is worth noting that, under current rules, the holder of a market discount bond does not have to annually include in gross income the accrued market discount
0025) or more of the stated redemption price at maturity times the number of years until maturity, a cash basis investor must include the market discount in income as it accrues if he has made an election to include accrued market discount
with respect to that bond or other market discount obligations, as discussed in Q 7731.
Since the amount of market discount that accrues before the maturity of the debt instrument is always less with the constant-rate method than with the straight-line method, investors are always better off for tax purposes if they elect to use the constant-rate method to compute accrued market discount
For a discount bond, the basis increases at the rate of the accrued market discount
until it reaches the principal value at maturity.
Gain on the disposition of any market discount bond is treated as ordinary income to the extent it does not exceed the accrued market discount
on the bond (Sec.
However, the gain on the sale or redemption of market discount bonds acquired after April 30, 1993 is taxed as ordinary income to the extent of the accrued market discount
Therefore, securities partnerships purchasing market discount obligations listed under 1) and 2) above after April 30, 1993, must treat any resulting gain as taxable ordinary income to the extent of any accrued market discount
If TIPS are purchased in a secondary market at a price below their adjusted principal, the holder reports accrued market discount
as ordinary interest income, either annually or when the bond matures or is sold.
1) he must include in his income (a) any interest accrued but not yet due on the bond at the time of sale (and not already included in income), and (b) with respect to obligations acquired after October 22, 1986, any accrued market discount
on the bond (not already included in income);