The de minimis tax rule determines when the gain on a discount bond is taxed as a capital gain instead of ordinary income. It sets a small threshold—based on the bond’s par value and the number of full years remaining to maturity—below which the discount is considered “too small” (de minimis is Latin for “about minimal things”) to be treated as market discount for tax purposes.
Definitions
– Par value: the face amount the issuer pays at maturity (commonly expressed per 100 of par).
– Market discount: the difference between par value and the price you paid when that price is below par (par − purchase price).
– De minimis amount: the threshold discount (in dollars per 100 of par) used to decide tax treatment.
– Accretion: the increase in value of a discount bond as it approaches par.
– Capital gain: profit taxed at capital gains rates when an investment is sold or redeemed after a qualifying holding period.
– Ordinary income: income taxed at regular income tax rates (usually higher than long-term capital gains rates).
Rule (plain form)
– Compute the de minimis amount = par value × 0.0025 × (number of full years from purchase to maturity).
– Compute the cutoff purchase price = par value − de minimis amount.
– If your purchase price is above the cutoff (i.e., market discount cutoff → discount is de minimis → treated as capital gain on sale/redemption (subject to holding-period rules).
– Purchase price ≤ cutoff → discount is a market discount → ordinary income treatment applies.
Short checklist (quick reference)
– Identify par value per 100 of face.
– Confirm full years to maturity (round down).
– Calculate de minimis amount = par × 0.0025 × full years.
– Calculate cutoff = par − de minimis amount.
– Compare your purchase price to cutoff.
– Check your holding period and consult tax rules or a tax advisor before reporting.
Worked numeric example
– Bond par value: 100.
– Full years to maturity at purchase: 5.
1) De minimis amount = 100 × 0.0025 × 5 = 1.25.
2) Cutoff price = 100 − 1.25 = 98.75.
– If you bought the bond at 99.50: market discount = 100 − 99.50 = 0.50 < 1
= Example continued and contrast
– If you bought the bond at 99.50: market discount = 100 − 99.50 = 0.50 1.25 → not de minimis. Tax consequences differ:
1. If you do not make an accrual election: the accrued portion of the market discount is treated as ordinary income to the extent of any gain when you sell or the bond matures. Example: if you later sell the bond for 101.00, total gain relative to your basis (97.50) is 3.50. Up to 2.