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The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
September 4, 1982, or you acquired them before March 2, amounts of OID previously includible in your income. In
1984, treat your part of OID as tax-exempt interest. To fig- this case, the rest of the gain is capital gain.
ure your gain or loss on the sale or trade of these bonds, An intention to call a debt instrument before maturity
reduce the amount realized by your part of OID. means there is a written or oral agreement or understand-
If the bonds were issued after September 3, 1982, and ing not provided for in the debt instrument between the is-
acquired after March 1, 1984, increase the adjusted basis suer and original holder that the issuer will redeem the
by your part of OID to figure gain or loss. For more infor- debt instrument before maturity. In the case of debt instru-
mation on the basis of these bonds, see Discounted ments that are part of an issue, the agreement or under-
tax-exempt obligations, earlier in this chapter. standing must be between the issuer and the original
Any gain from market discount is usually taxable on dis- holders of a substantial amount of the debt instruments in
position or redemption of tax-exempt bonds. If you bought the issue.
the bonds before May 1, 1993, the gain from market dis-
count is capital gain. If you bought the bonds after April Example 1. On February 9, 2022, you bought at origi-
30, 1993, the gain from market discount is ordinary in- nal issue for $7,600, Jones Corporation's 10-year, 5%
come. bond which has a stated redemption price at maturity of
You figure market discount by subtracting the price you $10,000. On February 13, 2023, you sold the bond for
paid for the bond from the sum of the original issue price $9,040. Assume you have included $334 of OID in your
of the bond and the amount of accumulated OID from the gross income (including the amount accrued for 2023)
date of issue that represented interest to any earlier hold- and increased your basis in the bond by that amount. Your
ers. For more information, see Market Discount Bonds in basis is now $7,934. If at the time of the original issue
chapter 1. there was no intention to call the bond before maturity,
A loss on the sale or other disposition of a tax-exempt your gain of $1,106 ($9,040 amount realized minus
state or local government bond is deductible as a capital $7,934 adjusted basis) is capital gain.
loss.
Example 2. If, in Example 1, at the time of original is-
Redeemed before maturity. If a state or local bond sue there was an intention to call the bond before maturity,
issued before June 9, 1980, is redeemed before it ma- your entire gain is ordinary income. You figure this as fol-
tures, the OID is not taxable to you. lows:
If a state or local bond issued after June 8, 1980, is re-
deemed before it matures, the part of OID earned while 1. Entire OID ($10,000 stated redemption price at
you hold the bond is not taxable to you. However, you maturity minus $7,600 issue price) . . . . . . . . . . $2,400
must report the unearned part of OID as a capital gain. 2. Minus: Amount previously included
in income . . . . . . . . . . . . . . . . . . . . . . . . . . 334
Example. On July 2, 2012, the date of issue, you 3. Maximum amount of ordinary income . . . . . . . . . $2,066
bought a 20-year, 6% municipal bond for $800. The face
amount of the bond was $1,000. The $200 discount was Because the amount in (3) is more than your gain of
OID. At the time the bond was issued, the issuer had no $1,106, your entire gain is ordinary income.
intention of redeeming it before it matured. The bond was
Market discount bonds. If the debt instrument has mar-
callable at its face amount beginning 10 years after the is-
ket discount and you chose to include the discount in in-
sue date.
come as it accrued, increase your basis in the debt instru-
The issuer redeemed the bond at the end of 11 years
ment by the accrued discount to figure capital gain or loss
(July 2, 2023) for its face amount of $1,000 plus accrued
on its disposition. If you did not choose to include the dis-
annual interest of $60. The OID earned during the time
count in income as it accrued, you must report gain as or-
you held the bond, $73, is not taxable. The $60 accrued
dinary interest income up to the instrument's accrued mar-
annual interest is also not taxable. However, you must re-
ket discount. See Market Discount Bonds in chapter 1.
port the unearned part of OID, $127 ($200 − $73), as a
The rest of the gain is capital gain.
capital gain.
However, a different rule applies if you dispose of a
Long-term debt instruments issued after May 27, market discount bond that was:
1969 (or after July 1, 1982, if a government instru- • Issued before July 19, 1984; and
ment). If you hold one of these debt instruments, you
must include a part of OID in your gross income each year • Purchased by you before May 1, 1993.
you own the instrument. Your basis in that debt instrument In that case, any gain is treated as interest income up to
is increased by the amount of OID that you have included the amount of your deferred interest deduction for the year
in your gross income. See Original Issue Discount (OID) in you dispose of the bond. The rest of the gain is capital
chapter 1. gain. (The limit on the interest deduction for market dis-
If you sell or trade the debt instrument before maturity, count bonds is discussed in chapter 3 under When To De-
your gain is a capital gain. However, if at the time the in- duct Investment Interest.)
strument was originally issued there was an intention to Report the sale or trade of a market discount bond in
call it before its maturity, your gain is generally ordinary in- Form 8949, Part I or Part II, whichever is appropriate. Use
come to the extent of the entire OID reduced by any the table How To Complete Form 8949, Columns (f) and
(g) in the Instructions for Form 8949 to help you figure the
Publication 550 (2023) Chapter 4 Sales and Trades of Investment Property 75
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