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
= Exampleand 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.