A taxpayer holds a bond with a face value of $1,000 and a coupon rate of 5%. They purchased the bond for $1,050 (premium). They elect to amortize the bond premium. In Year 1, the amortization amount is $5. How is this reported?

1. Identify Election: Amortize bond premium.<br/>2. Effect on Income: The amortization offsets the interest income received from the bond (reduces taxable interest).<br/>3. Effect on Basis: The basis of the bond is reduced by the amortization amount so that at maturity, basis equals face value.<br/>4. Result: Interest Income reduced, Basis reduced.