Question on discount and premium treasury bonds

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Question on discount and premium treasury bonds

Post by indexfundfan » Tue Apr 17, 2018 9:58 am

Discount treasury bond
When a bond is bought at a discount, it will "appreciate" in value to par when it reaches maturity. My understanding is that this "appreciation" or accrued interest must be reported each year as ordinary income. For the purpose of state taxes, is this accrued interest taxable subject to state and local taxes?

Premium treasury bond
For treasury bonds bought at premium, my understanding is that the depreciation must be amortized. Will the amount amortized each year offset the income from the bond directly, or can this only be regarded as a capital loss that follows the rule of a maximum of $3000 offset against income?

Thank you for any help!
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Re: Question on discount and premium treasury bonds

Post by patrick013 » Thu Apr 19, 2018 6:42 pm

Taxation of Bond Income

Premiums are usually taxed as a reduction of income.
Discounts are usually taxed as a capital gain at maturity
if the de-minimus rule allows as explained. Check your
estimated tax bracket and tax election.

Treasury's do not pay state tax so no worry there.
age in bonds, buy-and-hold, 10 year business cycle

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Re: Question on discount and premium treasury bonds

Post by BlackcatCA » Thu Apr 19, 2018 8:35 pm

Interesing. So if one buys Treasury at auction (discount) and hold to maturity, the interest is (federally) taxed at capital gain rate, rather than income rate?

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Re: Question on discount and premium treasury bonds

Post by stlutz » Fri Apr 20, 2018 2:28 am

The default way it would work is:

If you buy a bond with a par value of $100 for $105: Each year you amortize a part of that premium and you subtract that from the coupon payments. So (roughly) if this was 5 year bond with a coupon of 2%, you'd get $2 in interest and have $1 in "ABP adjustment" and so you'd pay tax on $1 per year.

If you buy a bond with a par value of $100 for $95: You will pay tax on the coupon payment each year. At maturity, you pay tax on the $5 of "accrued market discount". This is a taxable at your regular income rate, not at the capital gains rate.

The numbers themselves are all reported to you on your 1099 (for bonds purchased after 2013), but anyone buying individual bonds (including brokered CDs) should read the relevant sections of IRS Publication 550:

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Re: Question on discount and premium treasury bonds

Post by DetroitRick » Mon Apr 23, 2018 5:30 pm

I've been verifying my understanding on the same issue too, since I'm currently adding treasury bond positions. I stumbled on this today - a 4-page pdf from AAII Journal explaining the options for Federal taxes. As far as I can tell, it says the same thing as the IRS lays out (in IRS-speak) in Publication 550. Specifically, the simple flowchart on page 4 clarified it all for me.

Link to that (4-page) pdf: ... tax-issues

While this is dated 1999, I don't see that any of these specifics have changed since then (just the brokerage reporting requirements).

As far as the state tax issue goes, they generally follow IRS reporting regs, but not always. You probably have to look at your specific state (and local) instructions to be really sure. Specifically where they modify Federal AGI. My state just says to basically just remove income from US Government obligations from Federal AGI in computing state taxable income.

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