What is a Market Discount Bond? A Comprehensive Legal Overview

Q: What are the tax implications of market discount bonds?

Income from market discount bonds may be taxed differently than other types of bonds, so it&#039;s important to consult tax guidelines or a professional.

Q: Are all discounted bonds considered market discount bonds?

No, only those that meet specific criteria outlined in the Internal Revenue Code qualify.

Definition & Meaning

A market discount bond is a type of bond that is sold for less than its face value due to a decrease in its market price. This discount occurs after the bond's issuance and is typically a result of changes in interest rates or the issuer's creditworthiness. However, certain types of bonds are excluded from this definition, including short-term obligations (those maturing in one year or less), United States savings bonds, and installment obligations.

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Legal Use & context

The term "market discount bond" is primarily used in the context of taxation and investment law. It is relevant for individuals and businesses that invest in bonds, as it affects how the income from these bonds is taxed. Understanding market discount bonds is important for tax planning and compliance, especially for those who may use legal forms to report their investment income accurately.

Key legal elements

Real-world examples

Here are a couple of examples of abatement:

Example 1: An investor purchases a corporate bond with a face value of $1,000 for $950. This bond is considered a market discount bond because it was bought at a price lower than its face value.

Example 2: A government bond maturing in six months is sold for $980 instead of its $1,000 face value, qualifying it as a market discount bond. (hypothetical example)

Relevant laws & statutes

According to 26 USCS § 1355, market discount bonds are defined and regulated under the Internal Revenue Code. This statute outlines the tax treatment of income derived from such bonds.

Comparison with related terms

Term	Definition	Key Differences
Market discount bond	A bond sold below its face value after issuance.	Specifically refers to bonds with market price decreases.
Premium bond	A bond sold above its face value.	Opposite of market discount bond; sold for more than face value.
Zero-coupon bond	A bond that does not pay interest but is sold at a discount.	Does not pay periodic interest; sold at a deep discount.

Common misunderstandings

What to do if this term applies to you

If you own a market discount bond or are considering purchasing one, it is important to understand the tax implications. You may want to consult a tax professional for personalized advice. Additionally, users can explore US Legal Forms' templates for legal forms related to investment income reporting, which can help streamline the process.

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Quick facts

Market discount bonds are sold below face value.
Excludes short-term obligations, U.S. savings bonds, and installment obligations.
Tax treatment is governed by the Internal Revenue Code.