ExpertMedium1 markMultiple Choice
CPA · Question 68 · Area I: Individual Compliance and Planning
A taxpayer owns a bond with a face value of $1,000 and a 5% coupon. They bought it for $900 (market discount). They hold it to maturity. How is the $100 gain at maturity taxed?
A taxpayer owns a bond with a face value of $1,000 and a 5% coupon. They bought it for $900 (market discount). They hold it to maturity. How is the $100 gain at maturity taxed?
Answer options:
A.
Capital gain.
B.
Ordinary income.
C.
Tax-exempt.
D.
50% Capital / 50% Ordinary.
How to approach this question
Market Discount Rule: The gain representing the discount (up to the amount accrued) is Ordinary Income (Interest), not Capital Gain.
Full Answer
B.Ordinary income.✓ Correct
Ordinary income.
IRC §1276. Gain on the disposition of a market discount bond is treated as ordinary income to the extent of the accrued market discount.
Common mistakes
Treating the appreciation from discount as capital gain.
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