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

4.23 Sale or Retirement of Bonds and Notes

Gain or loss on the sale, redemption, or retirement of debt obligations issued by a government or corporation is generally capital gain or loss.

A redemption or retirement of a bond at maturity must be reported as a sale on Schedule D of Form 1040 (5.8) although there may be no gain or loss realized.

Corporate bonds with OID issued after 1954 and before May 28, 1969, and government bonds with OID issued after 1954 and before July 2, 1982.

If the bonds were originally issued at a discount (OID), you report your ratable monthly share of the OID element as ordinary income when the bonds are sold or redeemed; any gain exceeding OID is reported as capital gain. However, if there was an intention to call before maturity, gain is ordinary income to the full extent of the OID. A loss is a capital loss.

Corporate bonds with OID issued after May 27, 1969, and government bonds with OID issued after July 1, 1982.

The accrued amount of OID is reported annually as interest income (4.19) and added to basis; this includes the accrued OID for the year the bond is sold. If the bonds are sold or redeemed before maturity, you realize capital gain for the proceeds over the adjusted basis (as increased by accrued OID) of the bond, provided there was no intention to call the bond before maturity. If at the time of original issue there was an intention to call the obligation before maturity, the entire OID that has not yet been included in your income is taxable ...