Original-issue discount. When bonds are issued at substantially less than par value, the difference between the face amount and the initial offering price is known as original issue discount.
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Zero-coupon bonds are the best-known variety of this category of bonds. The tax treatment of original issue discount bonds is particularly complicated, so it is essential to consult a tax attorney or adviser when considering such an investment.
go here In general, the total amount of original issue discount will be included as income over the term of the bond based on a constant yield to maturity method, prior to the receipt of cash, even if the bondholder is an individual using the cash basis of accounting. Thus, a holder will have to pay tax each year on a portion of the original issue discount even though no actual cash interest is received.
Depreciation Payroll Accounting Bonds Payable Stockholders' Equity Present Value of a Single Amount Present Value of an Ordinary Annuity Future Value of a Single Amount Nonprofit Accounting Break-even Point Improving Profits Evaluating Business Investments Manufacturing Overhead Nonmanufacturing Overhead Activity Based Costing The interest you receive from corporate bonds is subject to federal and state income tax.
- Valuation of Callable Bonds under Progressive Personal Taxes and Interest Rate Uncertainty on JSTOR.
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You may generate capital gains on a corporate bond if you sell it at a profit before it matures. If you sell it up to a year from purchase, the gains are taxed at your ordinary rate. Conversely, if you sell a bond for less than you paid, you may incur a capital loss.
You may offset an unlimited amount of such losses dollar-for-dollar against capital gains you have realized on other investments bonds, stocks, mutual funds, real estate, etc. These rules apply to the sale of shares in bond funds as well as to individual bonds.