Publication 535 |
2000 Tax Year |
Bond Premium
Bond premium is the amount by which your basis in a bond right
after you get it is more than the total of all amounts payable on the
bond after you get it (other than payments of qualified stated
interest).
The term "bond," as used in this discussion, means any
interest-bearing bond, debenture, note, or certificate or other
evidence of debt. The term does not include any obligation
listed below.
- Your stock in trade.
- Property that would properly be included in your inventory
if on hand at the close of the tax year.
- Property held by you primarily for sale to customers in the
ordinary course of your trade or business.
Tax-exempt bonds.
If the bond yields tax-exempt interest, you must amortize the
premium. You cannot deduct the amortizable premium in figuring your
taxable income. However, each year you must reduce your basis in the
bond by the amortization for the year.
Taxable bonds.
You can choose to amortize the premium on taxable bonds. This
generally means that each year, over the life of the bond, you use
part of the premium to reduce the amount of interest includible in
your income. If you make this choice, you must reduce your basis in
the bond by the amortization for the year. The premium on the bond is
part of your basis in the bond.
Inflation-indexed instruments.
An inflation-indexed debt instrument is generally a debt instrument
on which the payments are adjusted for inflation and deflation (such
as Treasury inflation-indexed securities). Determine the premium on an
inflation-indexed debt instrument as of the date you acquire the
instrument by assuming that there will be no inflation or deflation
over the remaining term of the instrument. Allocate the premium over
the remaining term of the instrument by making the same assumption.
Reduce the instrument's interest income for the tax year by the
premium allocable to the tax year. Use any excess premium allocable to
the tax year to offset the original issue discount on the instrument
for the year.
Basis adjustment.
If you are required to amortize bond premium, or choose to do so,
you must decrease the basis of the bond by the amortizable bond
premium. The result is the adjusted basis you use to figure gain or
loss on the sale or redemption of the bond.
More information.
For more information on how to figure and report bond premium, see
Publication 550.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|