J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

4.21 Discount on Short-Term Obligations

Short-term obligations (maturity of a year or less from date of issue) may be purchased at a discount from face value. If you are on the cash basis, the discount on short-term obligations other than tax-exempt obligations must be reported as interest income in the year the obligations are sold or redeemed unless you elect to include the accrued discount in income currently.

EXAMPLE

In May 2011, you paid $970 for a short-term note with a face amount of $1,000. In January 2012, you receive payment of $1,000 on the note. On your 2012 tax return, you report $30 as interest.

Discount must be currently reported by dealers and accrual-basis taxpayers.

Discount allocable to the current year must be reported as income by accrual-basis taxpayers, dealers who sell short-term obligations in the course of business, banks, regulated investment companies, common trust funds, certain pass-through entities, and for obligations identified as part of a hedging transaction. Current reporting also applies to persons who separate or strip interest coupons from a bond and then retain the stripped bond or stripped coupon; the accrual rule applies to the retained obligation.

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Caution

Reporting Zero Coupon Bond Discount

Zero coupon bond discount is reported annually as interest over the life of the bond, even though interest is not received. ...