Accrued Market Discount Taxation on Bond

Accrued market discount refers to the difference between the purchase price of a bond and its face value when the bond is bought at a price lower than its face value in the secondary market. This discount is treated as interest income for tax purposes. Here's how it works: 1. **Recognition of Income**: You can choose to recognize the market discount as it accrues over the period you hold the bond. This means you would include a portion of the discount in your income each year. Alternatively, you can defer recognizing the income until you sell the bond or it matures. 2. **Calculation**: The accrued market discount is calculated on a straight-line basis or using the constant yield method. The straight-line method spreads the discount evenly over the remaining life of the bond, while the constant yield method accrues the discount based on the bond's yield to maturity. 3. **Tax Treatment**: If you choose to defer the recognition of market discount, the accrued discount is taxed as ordinary income when you sell the bond or it matures. This is different from capital gains, which may be taxed at a lower rate. 4. **Election to Include in Income Currently**: If you elect to include the market discount in your income as it accrues, you must continue to do so for all market discount bonds you acquire thereafter. This election can be beneficial if you prefer to spread out the tax liability over several years. 5. **Reporting**: You report the accrued market discount on your

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